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S. HRG. 107–1141

COLLAPSE OF THE ENRON CORPORATION

HEARING

BEFORE THE

COMMITTEE ON COMMERCE,

SCIENCE, AND TRANSPORTATION

UNITED STATES SENATE

ONE HUNDRED SEVENTH CONGRESS

SECOND SESSION

FEBRUARY 26, 2002

Printed for the use of the Committee on Commerce, Science, and Transportation

(

(II)

COMMITTEE ON COMMERCE, SCIENCE, AND TRANSPORTATION

ONE HUNDRED SEVENTH CONGRESS

SECOND SESSION

ERNEST F. HOLLINGS, South Carolina, Chairman

DANIEL K. INOUYE, Hawaii

JOHN D. ROCKEFELLER IV, West Virginia

JOHN F. KERRY, Massachusetts

JOHN B. BREAUX, Louisiana

BYRON L. DORGAN, North Dakota

RON WYDEN, Oregon

MAX CLELAND, Georgia

BARBARA BOXER, California

JOHN EDWARDS, North Carolina

JEAN CARNAHAN, Missouri

BILL NELSON, Florida

JOHN McCAIN, Arizona, Ranking Republican

TED STEVENS, Alaska

CONRAD BURNS, Montana

TRENT LOTT, Mississippi

KAY BAILEY HUTCHISON, Texas

OLYMPIA J. SNOWE, Maine

SAM BROWNBACK, Kansas

GORDON SMITH, Oregon

PETER G. FITZGERALD, Illinois

JOHN ENSIGN, Nevada

GEORGE ALLEN, Virginia

KEVIN D. KAYES, Democratic Staff Director

MOSES BOYD, Democratic Chief Counsel

JEANNE BUMPUS, Republican Staff Director and General Counsel

(III)

CONTENTS

Page

Hearing held on February 26, 2002 ....................................................................... 1

Statement of Senator Allen ..................................................................................... 9

Statement of Senator Boxer .................................................................................... 8

Statement of Senator Breaux ................................................................................. 7

Statement of Senator Burns ................................................................................... 6

Prepared statement .......................................................................................... 6

Statement of Senator Carnahan ............................................................................. 7

Statement of Senator Cleland ................................................................................. 5

Statement of Senator Dorgan ................................................................................. 1

Statement of Senator Fitzgerald ............................................................................ 3

Prepared statement .......................................................................................... 4

Statement of Senator Hutchison ............................................................................ 53

Statement of Senator McCain ................................................................................. 2

Statement of Senator Nelson .................................................................................. 17

Statement of Senator Rockefeller ........................................................................... 9

Prepared statement .......................................................................................... 10

Statement of Senator Snowe ................................................................................... 16

Prepared statement .......................................................................................... 16

Statement of Senator Wyden .................................................................................. 5

WITNESSES

McMahon, Jeffrey, President and Chief Operating Officer, Enron Corporation 14

Prepared statement .......................................................................................... 15

Skilling, Jeffrey, former Chief Executive Officer, Enron Corporation,

accompanied by Bruce Hiler, Esq., O’Melveny & Myers .................................. 18

Watkins, Sherron, Vice President of Corporate Development, Enron

Corporation, accompanied by Philip Hilder, Esq. .............................................. 10

Prepared statement .......................................................................................... 13

(1)

COLLAPSE OF THE ENRON CORPORATION

TUESDAY, FEBRUARY 26, 2002

U.S. SENATE,

COMMITTEE ON COMMERCE, SCIENCE, AND TRANSPORTATION,

Washington, DC.

The Committee met, pursuant to notice, at 9:30 a.m. in room

SD–253, Russell Senate Office Building, Hon. Byron L. Dorgan,

presiding.

OPENING STATEMENT OF HON. BYRON L. DORGAN,

U.S. SENATOR FROM NORTH DAKOTA

Senator DORGAN. I call the hearing to order. We would ask for

order in the hearing room.

This morning the Committee continues its examination of what

has happened with respect to the Enron Corporation. We have had

two previous hearings. Previously, we heard from a number of

Enron employees, retirees, and investors, many of whom lost their

life savings when this corporation collapsed.

Today, we hope to begin the process of hearing from some of

those who worked inside the Enron Corporation. We will hear from

Ms. Sherron Watkins. She is the employee who wrote the memo to

Mr. Lay last August saying that Enron was in danger of imploding

‘‘in a wave of accounting scandals.’’ She continues to be employed

by the Enron Corporation.

We also will hear from Mr. McMahon. Mr. McMahon is the

former Treasurer of the Enron Corporation and now serves as

President and Chief Operating Officer. Finally, we will hear from

Mr. Skilling who is a former CEO of Enron.

Some 10 weeks ago, as we began the inquiry, Ms. Janice Farmer

sat at our witness table. She was an Enron employee and told us

how the bankruptcy of Enron had demolished her life savings. This

is a case of America’s largest corporate bankruptcy. It is not unusual that, in our system, or in our society, enterprises would file

for bankruptcy. It is unusual that we have had a corporation file

for bankruptcy and a subsequent investigation, called the Powers

Report, launched by the Board of Directors of that corporation, saying what they found inside the corporation was ‘‘appalling.’’

It is also the case that the people at the top in this corporation,

officers and members of the Board of Directors, made a substantial

amount of money, tens of millions of dollars in some cases, while

people at the bottom, employees and investors, lost their life savings in many instances.

2

The question here is what happened? How did it happen? Who

was responsible for it happening? And what can we do to prevent

this sort of thing from happening again?

I have said previously—and let me mention again how important

this is—the method by which we accumulate capital in this country

is to have an investor in Bismarck, North Dakota, or anywhere in

the country for that matter, buy a share of stock based on the belief that the financial statement represented by that corporation

and approved by its accountants is a fair and honest representation

of what is happening inside that corporation.

If that trust is broken—and I believe that it was in this situation—when that trust is broken, it undermines the method by

which we accumulate capital for our system of capitalism. I think

we must find out what happened. Where were the accountants?

Where was the law firm? Where were the security analysts? Where

were the officers and directors of the company? And how do we prevent this sort of thing from happening again?

It is my hope, following recognition of the Ranking Member of

the Full Committee and Subcommittee, that we could limit opening

statements to a minute or so for those who have opening statements and then go right to the witnesses. We do have a vote that

will occur at 10 o’clock. It is my intention that we would break for

15 minutes during that vote and then come back and proceed.

Let me call on Senator McCain for his opening statement.

STATEMENT OF HON. JOHN MCCAIN,

U.S. SENATOR FROM ARIZONA

Senator MCCAIN. Thank you, Senator Dorgan, for chairing this

hearing, and I thank the witnesses for appearing before us today.

Enron has drawn an enormous level of public and Congressional

interest because the story of this one company challenges fundamental assumptions about our economic system. One such assumption is that the public receives accurate assessments of a company’s

financial health and that they rely on this information to make rational investment decisions. Enron’s collapse raises serious doubts

about whether existing financial disclosure rules and accounting

standards enable the public to get an accurate or even a rough idea

about companies’ true financial condition.

Another assumption is that there are adequate gatekeepers in

place to filter financial information and ensure its integrity. Enron

has proven this assumption wrong. Gatekeepers within the company failed, external gatekeepers in the form of auditors and financial analysts failed, and Congress failed.

Enron’s bankruptcy dramatically illustrates that the corporate

interests and public interests cannot be assumed to be the same.

Enron has given all of us a costly lesson in showing that we cannot

rely on a system that lacks adequate regulation and that depends

solely on conscience and good judgment.

I hope our witnesses are able to explain to this Committee what

went so terribly wrong with Enron and what you would have done

or would have us do differently to ensure this story is not repeated.

Thank you.

Senator DORGAN. Senator McCain, thank you very much.

3

Before I call on the Ranking Member of the Consumer Affairs

Subcommittee, let me say that there are more than eight Members

present and Sherron Watkins has requested the Committee issue

a friendly subpoena compelling her testimony before the Committee

today. I would move that the Chairman be authorized to issue a

subpoena on behalf of the Committee. All those in favor say aye.

[A chorus of ayes].

Senator DORGAN. Opposed, no.

[No response].

Senator DORGAN. The motion is agreed to.

Let me call on Senator Fitzgerald.

STATEMENT OF HON. PETER G. FITZGERALD,

U.S. SENATOR FROM ILLINOIS

Senator FITZGERALD. Thank you, Mr. Chairman.

Ms. Watkins, Mr. McMahon, thank you for being here today.

Mr. Skilling, I want to thank you very much for appearing and

agreeing to testify. Some of your Enron colleagues who were also

asked to testify have made a different choice. Watching them, I

have to believe that you are aware that your voluntary appearance

before this Committee entails a measure of risk and that you therefore must be somewhat anxious. Consequently, whatever role you

may have played in the collapse of Enron, I think there is at least

something to be said for your willingness to talk about what happened to your company.

I do, however, approach your testimony with some skepticism.

Appearing before the House, you disclaimed responsibility. That

disclaimer encouraged the perception that Mr. Andrew Fastow

played perhaps the pivotal role in the collapse of the company. But

if the theory is that Fastow went rogue somewhere deep in the jungles of Enron and was the assault agent of the apocalypse, I just

do not buy it.

As Senators, we are intensely interested not just in individual responsibility, but also in what appears to have been a systemic collapse of controls, a spectacular corporate implosion—and the collapse of controls occured both within the company at all levels of

risk management and external to the company, as Senators

McCain and Dorgan have already indicated.

We also saw the collapse of controls outside the corporation,

whether by the rating agencies, the auditing firms, the law firms,

the analysts, and even at the end of the day, the SEC.

Our purpose then is to figure out how JEDIs, LJMs, Raptors,

and a Chewco turned the whole world on its head. We have a chess

game here, Mr. Skilling, and the challenge is to find a way to check

every single one of the moves you made on that Enron Board.

As part of that effort, this Committee thought it important to ask

both you and Mr. Lay, as central figures in this drama, to tell us

what you know.

Now, Mr. Skilling, we are witnessing a tale of two CEOs. As you

may know, your predecessor and successor, Mr. Lay, chose not to

speak. Mr. Lay walked away. But that was only one possible

choice. You have chosen differently and this Committee is pleased

that the Fifth Amendment flu has not claimed another victim. Your

4

willingness to testify is appreciated and I am sure there are many

advising you to remain silent.

Mr. Skilling, I think there may be a great deal you can tell us

about your days at Enron that would both help this Committee and

this country. I look forward to your testimony.

Senator DORGAN. Senator Fitzgerald, thank you very much.

For those of you who have just arrived, I had asked that if we

could perhaps, for those who do have opening statements, limit

them to a minute so that we can begin the testimony. We had rather good opening statements when Mr. Lay appeared.

Senator FITZGERALD. Mr. Chairman, could I get permission or

consent of the Committee to enter my full statement in the record,

as I abbreviated it somewhat?

Senator DORGAN. Without objection.

[The prepared statement of Senator Fitzgerald follows:]

PREPARED STATEMENT OF HON. PETER G. FITZGERALD

U.S. SENATOR FROM ILLINOIS

Mr. Skilling, I want to thank you very much for appearing and agreeing to testify

today. Some of your Enron colleagues who were also asked to testify have made a

different choice. Watching them, I have to believe that you are aware that your voluntary appearance before this committee entails a measure of risk and that you

therefore must be somewhat anxious. Consequently, whatever your role may have

been in the collapse of Enron, I think there is at least something to be said for your

willingness to talk about what happened to your company.

I do, however, approach your testimony with some skepticism. Appearing before

the House, you disclaimed responsibility. That disclaimer encouraged the perception

that Mr. Andrew Fastow played perhaps the pivotal role in the collapse of the company. But if the theory is that Fastow went rogue somewhere deep in the jungles

of Enron—and was the sole agent of the apocalypse—I just don’t buy it.

As Senators, we are intensely interested not just in individual responsibility, but

also in what appears to have been a systemic collapse of controls—a spectacular corporate implosion. It’s a collapse that appears to have been both intra- and inter-institutional. Within Enron itself, we see a fundamental collapse of control beginning

with the employees explicitly charged with managing Enron’s many off-the-books

partnerships. We see a collapse of control at the level of top management—including

the Chairman and the CEO—charged with overseeing the employees managing the

partnerships. We see a collapse of control by the Board of Directors charged with

monitoring the performance of the Chairman and CEO who are, in turn, charged

with monitoring the performance of the employees monitoring the performance of

these partnerships. That’s just within the confines of Enron itself.

Then we see a collapse of controls at a macro level—by the very institutions that

are supposed to ensure the integrity of the capital markets. The United States has

a whole industry—the accounting industry—to audit publicly traded corporations.

Enron busted through the auditors. Investment and lending institutions played a

role as well, improvidently extending capital and credit for ventures they apparently

didn’t understand and about which they failed to ask pertinent questions. Enron

busted through the banks. Stock analysts are supposed to monitor the direction of

the companies they follow and warn investors of potential pitfalls. Enron busted

through the analysts. Rating agencies play a critical role in evaluating the financial

condition of publicly traded companies and in warning investors of negative trends.

Enron busted through the agencies. Finally, we have a Securities Exchange Commission, which polices the financial markets and protects investors. Apparently, not

even the SEC could stop an Enron.

Our purpose, then, is to figure out how JEDIs, LJMs, Raptors and a Chewco

turned a whole world on its head. We have a chess game here, Mr. Skilling, and

our challenge is to find a way to check every single one of the moves you made on

that Enron board. As part of that effort, this Committee thought it important to ask

both you and Mr. Lay, as central figures in this drama, to tell us what you know.

Now, Mr. Skilling, we are witnessing a tale of two CEOs. As you may know, your

predecessor—and successor—Mr. Lay, chose not to speak. Mr. Lay walked away.

But that was only one possible choice. You have chosen differently, and this committee is pleased that the Fifth Amendment flu hasn’t claimed another victim. Your

5

willingness to testify is appreciated when I’m sure there are many advising you to

remain silent.

Mr. Skilling, I think there may be a great deal you can tell us about your days

at Enron that would help both this committee and the country. I look forward to

your testimony.

Senator DORGAN. Senator Wyden.

STATEMENT OF HON. RON WYDEN,

U.S. SENATOR FROM OREGON

Senator WYDEN. Thank you, Mr. Chairman.

I think it particularly important this morning that we examine

the relationship between Mr. McMahon and Mr. Fastow. I would

like to just go through the list of people that say that Mr. Skilling

knew or was warned about the partnerships that were managed by

Mr. Fastow. Mr. McMahon has said he complained personally to

Mr. Skilling about his concerns with the Fastow partnerships. According to Ms. Watkins, J. Clifford Baxter told her that he had met

with Mr. Skilling repeatedly to express his concerns about the partnerships. In an interview with the law firm Vinson & Elkins,

Enron’s Chief Risk Officer said that he talked to Mr. Skilling as far

back as 2000 about the mounting risks of the Raptor partnerships.

Ken Lay told internal investigators that Mr. Skilling knew the details of many of the key partnerships and even presented the idea

for one of them to the Board of Directors. The Powers Report states

that Mr. Skilling, Ken Lay, and the rest of the Board agreed and

understood, and Mr. Skilling was the senior member of management responsible for the LJM partnership, and Mr. Skilling certainly knew or should have known the magnitude and the risks associated with these transactions.

It is clear that there was a long record of individuals right at the

center of the company who were saying that you, Mr. Skilling, were

aware of this. I think what I want to examine, because you have

said that you have done nothing wrong and that you did not know

about much of this, is really how many warnings would have been

needed in order to have you take seriously the threats that so

many around you were talking about. I hope we will get to examine

that and other issues.

Thank you for the chance to make this statement.

Senator DORGAN. Senator Cleland.

STATEMENT OF HON. MAX CLELAND,

U.S. SENATOR FROM GEORGIA

Senator CLELAND. Mr. Skilling and those of you who are willing

to testify today, thank you for appearing before us. I might say, I

am sure this is an unreal feeling for you, an unreal experience. In

many ways it is an unreal experience for me. I just want you to

know where I am coming from. My state, particularly the 262,000

teachers and the well over 100,000 retired state employees, lost

$127 million, Mr. Skilling, due to the failures, I think, of leadership

and openness and in effect the lying, cheating, and stealing of the

top officials of Enron.

I will be asking questions today, not so much on my behalf, but

on behalf of the teachers, the retired employees, and the people in

Georgia who worked for Enron, who believed in you and your leadership team, many of whom have had to declare personal bankVerDate 03-FEB-2003 08:49 Sep 29, 2005 Jkt 088896 PO 00000 Frm 00009 Fmt 6601 Sfmt 6601 D:\DOCS\88896.TXT SSC1 PsN: SSC1
6

ruptcy because your company went bankrupt due to the bankrupt

leadership of that company.

Thank you, Mr. Chairman.

Senator DORGAN. Senator Burns.

STATEMENT OF HON. CONRAD BURNS,

U.S. SENATOR FROM MONTANA

Senator BURNS. Mr. Chairman, I will just submit my statement

for the full record. I want to thank the executives for appearing

here today. I appreciate that very much, and the willingness to answer some of the questions that will be asked by this panel.

I still think we are boiling down to answer the three W’s: not

only what, but when it was apparent that we had really serious internal problems, and why the management acted as they did. Also

I believe we are here to listen and make judgment, was it the failure of the laws that are in place now and what we should do from

here on. I will tell you, no matter what happens after this, all the

problems that harmed the retirement funds, investors, and employees, will not suddenly be gone after these hearings are over or after

the dust has settled from the Enron collapse.

I think it is incumbent on us to take the information gained here

and more information from the agencies that were involved in the

enforcement of those regulations to do what is necessary to protect

the American people. I think our system is at stake here and that

it is up to us to make sure that it works in case this happens

again.

Now, I know how the panel that is before us today feels this

morning. I went stone broke once, too. But I did not have as many

moving parts as it appears that this case might have had. But

nonetheless, I believe that we have to take and judge from what

we gather today and prevent that the protection of the system is

in place and the confidence is restored in the American system,

which has served more people in this country than any other system that has ever been invented on this planet.

Thank you very much, Mr. Chairman.

[The prepared statement of Senator Burns follows:]

PREPARED STATEMENT OF HON. CONRAD BURNS,

U.S. SENATOR FROM MONTANA

Thank you Mr. Chairman for holding this hearing. I welcome our three witnesses

and I look forward to their testimony today. I have a few brief remarks I would like

to offer for the record.

As in our previous hearings, I am hopeful that the information offered today can

further enlighten this committee and the American people of the events that led to

Enron’s collapse. I am hopeful we can answer to the 4 Ws. Not only What, but When

it was apparent that there were these internal problems, Why management acted

they way they did, and Who were the principals. I believe we should be here to listen and be prepared to act based on the information collected and on the facts as

they are known.

As I have stated before, Congress is tasked with a responsibility to the American

people. We are not here to judge or convict but we are here to ensure the American

people that when a circumstance such as this, the folks that are at the helm do the

right thing and that is protect those who have little to control the situation or have

the ability to protect themselves. I consider this an extremely important task as our

Nation’s economy and the basic principles of capitalism have been jeopardized by

the Enron collapse.

We must find out which rules were bent or broken along the way, and the rules

that should have been in place but did not exist. Once these important questions

7

have been answered, we can address policy concerns at the SEC, FASB and other

agencies with jurisdiction, or ultimately, Congress. In short, Congress WILL take

action to make sure this collapse and the ramification can be prevented.

In conclusion, I believe that it is important to remember we cannot legislate morality, that is something we expect of all Americans regardless of whether they are

powerful corporate executives or blue collar workers working to put food on their

family’s table. In this case it is evident we can write out an extensive list of people

to blame and Enron’s employees won’t suddenly have a solid future. Private investors won’t magically see their stock gain value. Retirees’ 401(k) plans won’t suddenly re-appear. I don’t think it is out of line to ask the important question of what

now? What are Enron’s plans for break-up and their actions and plans for former

and present employees who lost so much. I believe we need to constantly remind

ourselves that this is not about Enron executives, this is about the Nation’s economy

and investor confidence.

Senator DORGAN. Senator Breaux.

STATEMENT OF HON. JOHN B. BREAUX,

U.S. SENATOR FROM LOUISIANA

Senator BREAUX. Just very briefly, Mr. Chairman, thank you.

I think when you have a bad event, a lot of times there is a tendency for the people who surround the bad event to all say: I do not

know how it happened, I do not know when it happened, and I do

not know why it happened; it just happened. Well, things do not

just happen.

There are reasons for things that are bad—how they occur, when

they occur, and why they occur. I think it is important for this

Committee to really find out what happened, to find out what the

Federal role is in seeing that the laws that protect the American

people are, in fact, the right laws, and if they need to be changed,

that we do our very best to make sure that they are, in fact,

changed. That is what we are trying to find out.

There are other venues for other activities surrounding this situation, but we need to know what happened and how and where and

why.

Thank you.

Senator DORGAN. Senator Carnahan.

STATEMENT OF HON. JEAN CARNAHAN,

U.S. SENATOR FROM MISSOURI

Senator CARNAHAN. Thank you, Mr. Chairman.

This Committee has an extraordinary opportunity today. The

three who have agreed to testify can help us unravel the tangled

events that ensnared Enron. As top executives, they should have

been able to give a reasonable explanation of why America’s seventh largest company collapsed in a wave of accounting scandals,

as predicted by one of these witnesses.

Each of these witnesses has testified already before the House.

Their testimony on different days presented conflicting accounts,

and we did not receive a true picture. Today, these witnesses have

a duty to explain what they knew and how they responded to what

they knew.

I realize the painstaking work of investigating Enron’s collapse

and the accountability will fall to others—the Securities and Exchange Commission, the Justice Department, the the Federal

courts—but the job of this Committee is also important. Congress

is responsible for crafting the laws that govern our financial marVerDate 03-FEB-2003 08:49 Sep 29, 2005 Jkt 088896 PO 00000 Frm 00011 Fmt 6601 Sfmt 6601 D:\DOCS\88896.TXT SSC1 PsN: SSC1
8

kets and overseeing the enforcement of these laws by the Executive

Branch. But, Members of Congress also serve as representatives of

the people of this nation, and they want to know why this happened.

They want to know if it is happening elsewhere, and they want

to know if it will happen again. It is in the public interest to know

why jobs were lost, why savings evaporated, and why confidence

was shattered.

Mr. Skilling, if you plan to tell this Committee that you did not

understand Enron’s true financial condition, then you will need to

explain why, why you failed to understand things that any diligent

CEO would have understood. If you insist that you were unaware

of the company’s financial condition, then I hope that you are prepared to explain why you portrayed yourself as someone who did.

I look forward to hearing from each of the witnesses today, and

I thank them for agreeing to testify. I hope you have come here

today armed only with the truth and ready to bear that burden for

us with a sincere heart. Thank you.

Senator DORGAN. Senator Boxer.

STATEMENT OF HON. BARBARA BOXER,

U.S. SENATOR FROM CALIFORNIA

Senator BOXER. Thank you, Mr. Chairman, for your leadership

on this issue.

Mr. Skilling, when it is my turn to question I am going to talk

about the energy crisis that California experienced. Just to give

you a little heads up of the line of my questioning, I want to tell

you a little bit about the story that is beginning to emerge to Californians, the way we are seeing this crisis. This is how we see it.

We see that Enron got out from governmental oversight at both the

state and Federal level, and worked very aggressively to get out

from under that oversight. The sole exception was the Federal Energy Regulatory Commission.

Mr. Chairman, I have asked them, the FERC, to give us a list

of meetings that they have had with Enron. They put together a

list from their recollection, and we see that there are 25 meetings

in the period of time in which Californians were desperate for them

to act. I am going to question you about this aggressive lobbying

with FERC decisionmakers.

We also hear from Enron traders—that is t-r-a-d-e-r-s—that

Enron jammed transmission lines, used futures and derivatives to,

according to California State Senator Joe Dunn, possibly buy and

sell the same electricity 15 times, in an effort to inflate prices.

As you answer these questions, I hope that you will realize that

at the time you were making jokes about California, we were realizing that energy is a necessity, not a luxury, and we were worried,

Mr. Skilling, in the summer that elderly people in the inland parts

of my state might lose their air conditioning and literally face

death. The agriculture industry in my state was fearful that loss

of refrigeration would cause economic devastation. Silicon Valley

put solving the energy crisis as its number one priority in order to

keep the information economy flowing. In the winter months, as we

still were getting no relief from FERC, we feared that freezing temperatures would harm our people, particularly the elderly and frail.

9

From everything I can put together, Mr. Skilling, you helped

cause these anxieties while you laughed about it. The people of

California were not laughing then. They are not laughing now. Our

state wants justice, and I hope that today maybe we can get on

that path to justice.

Thank you.

Senator DORGAN. Senator Allen.

STATEMENT OF HON. GEORGE ALLEN,

U.S. SENATOR FROM VIRGINIA

Senator ALLEN. Thank you, Mr. Chairman.

I agree with Senator Breaux’s view. Whether anybody was deliberate and willful in their deceit and fraud, or simply negligent will

be determined not in this Committee, but rather in a criminal or

civil proceeding in the courts. The larger issue is that there are

many people who lost much of their investments, such as savings

for their children’s college education or their retirement, because

they believed that Enron was a sound investment. That is the larger issue here because it is a matter of confidence for the American

people as to the reliability and the credibility of the information

about the company’s financial condition. They need a clear and

fully accurate description of assets and liabilities, cash-flow, true

revenues, and true costs and obligations.

Mr. Chairman, a reliable accounting system is the linchpin of our

free market system. This is not just about individual investors. It

relates to the retirement systems in various companies, various

state organizations, as well as even investment advisers who were

misled as to the actual economic viability of Enron.

I appreciate Ms. Watkins, Mr. Skilling, and Mr. McMahon coming here today. I hope that in the midst of all this, our witnesses

will tell us what they believe could have and should have been

done differently to have prevented the chicanery and deceit that

robbed so many investors of their savings. We need to learn from

this so that we can make changes in laws that would be appropriate and practical to make sure that investors and their advisers

have full access to information about companies. That should be

the goal of this Committee: To learn what went wrong and how it

can be prevented in the future.

I thank these witnesses here for hopefully sharing with us what

they think can be done, because this is about more than Enron in

the views of most people in this country. Hopefully, there will be

remedies. But we need to move forward to make sure that something like this cannot happen again.

Thank you, Mr. Chairman.

Senator DORGAN. Senator Rockefeller.

STATEMENT OF HON. JOHN D. ROCKEFELLER IV,

U.S. SENATOR FROM WEST VIRGINIA

Senator ROCKEFELLER. Mr. Chairman, I will put my statement in

the record and note also that I strongly associate my views with

those expressed by Senator Carnahan, Senator Burns, and Senator

Allen.

Thank you.

[The prepared statement of Senator Rockefeller follows:]

10

PREPARED STATEMENT OF HON. JOHN D. ROCKEFELLER IV,

U.S. SENATOR FROM WEST VIRGINIA

Thank you, Mr. Chairman, for holding this hearing. I will not offer an opening

statement, except to say that I hope we all realize the primary reason we should

be conducting this inquiry is to make sure that the types of things that happened

to the employees, retirees, and investors of Enron do not happen to anyone else

whose life’s savings are invested in a major corporation.

This is not about partisanship, and it is not about which Member of Congress took

campaign contributions from which company or which executive. This is very simply

an investigation that is most relevant as a cautionary tale. Like all Americans, we

should be angry about what Enron did, but let’s dedicate ourselves to conducting

an investigation the intent of which is to prevent this from happening again.

Senator DORGAN. Let me observe that this is the Congress, and

not a criminal justice system proceeding. It is not a prosecution; it

is a search for the truth in a congressional hearing. Those are very

different approaches. We have three people to testify today who

have testified previously on different occasions, and we have heard

three very different stories about what happened inside the Enron

Corporation. I welcome the opportunity to take the testimony today

from these three:

Ms. Sherron Watkins, Vice President of Corporate Development,

Enron Corporation; Mr. Jeffrey McMahon, President and Chief Operating Officer, Enron Corporation; and Mr. Jeffrey Skilling, former

Chief Executive Officer of the Enron Corporation.

The witnesses know that it is our intention to take testimony

today under oath. If there are no objections to that, by the rules

of this Committee, you are also advised that you are entitled to be

advised by counsel during your testimony. I would ask that when

I call on you to begin your testimony that you identify your counsel

for us.

I would like, if we could, to have the three witnesses rise and

raise your right hand, and I will give you the oath:

Do you swear that the testimony you are about to give is the

truth, the whole truth, and nothing but the truth?

Ms. WATKINS. I do.

Mr. SKILLING. I do.

Mr. MCMAHON. I do.

Senator DORGAN. You may be seated. You are under oath and

recognized for opening remarks.

We will begin the opening remarks with Ms. Watkins. Ms. Watkins, why do you not proceed and identify your counsel for the

Committee.

STATEMENT OF SHERRON WATKINS, VICE PRESIDENT

OF CORPORATE DEVELOPMENT, ENRON CORPORATION;

ACCOMPANIED BY PHILIP HILDER, ESQ.

Ms. WATKINS. My counsel is Mr. Philip Hilder.

Senator DORGAN. Would you pull the microphone very close to

you while you are presenting testimony. Thank you very much.

Ms. WATKINS. Good morning, Mr. Chairman, Members of the

Committee. I am Sherron Watkins and I thank you for the opportunity to speak to you this morning. I am currently employed by

Enron Corporation as a Vice President. By way of background, I

hold a master’s degree in professional accounting from the University of Texas at Austin, and I have been a certified public accountant since 1983.

11

I began my career in 1982 at Arthur Andersen as an auditor. I

spent eight years at Andersen in both the Houston and New York

offices. I joined New York-based MG Trade Finance in 1990 to

manage their commodity-backed finance assets, a position I held

until October 1993.

In October 1993, I was hired by Mr. Andrew Fastow and moved

back to Houston to manage Enron’s newly formed partnership with

CalPERS, California Public Employee Retirement System. The

partnership was called the Joint Energy Development Investments

Limited Partnership, or JEDI. I held the JEDI portfolio management position until the end of 1996.

Senator ALLEN. Mr. Chairman, it is really hard to hear because

of the noise in the hall, and Ms. Watkins we really want to hear

you.

Senator DORGAN. Senator Allen is correct. Let us ask that we

close the door. Do we have security at the door? If we could ask

that the door be closed and remain closed.

Ms. Watkins, if you would pull the microphone as close as you

can and speak up, the Committee would very much appreciate it.

Ms. WATKINS. Just continuing with my testimony: From 1997

until early 2000, I worked for Enron International, primarily in the

mergers and acquisitions group, which is also known as the corporate development group. In early 2000, I transferred to Enron

Broadband Services, where I worked until June of 2001 in a variety

of roles.

In mid- to late June of 2001, I went to work directly for Mr.

Fastow, assisting in the corporate development work that had recently been put under his supervision upon the resignation of Cliff

Baxter in May of 2001. I worked for Mr. Fastow in this new role

until August of 2001. I have since been reassigned to the human

resources group with a variety of roles.

While working for Mr. Fastow in 2001, I was charged with reviewing all assets that Enron considered for sale and determining

the likely economic impact of the sale. As part of the sale analysis,

I reviewed the estimated book values and market values of each

asset. A number of assets were hedged with an entity called

Raptor. Any asset that was hedged should, for the most part, have

a locked-in sales value for Enron. Meaning that despite current

market prices, Enron should realize the hedged price that it held

with Raptor.

It was my understanding that the Raptor special purpose entities

were owned by LJM, the partnership owned by Mr. Fastow. In

completing my work, certain Enron business units provided me

with analyses that showed that certain of the hedged losses incurred by Raptor were actually coming back to Enron. The general

explanation was that the Enron stock backstopping the Raptor

hedge had declined in value such that Raptor would have a shortfall and would be unable to fully cover the hedged price that it

owed to Enron.

I was highly alarmed by the information I was receiving. My understanding as an accountant is that a company could never use

its own stock to generate a gain or avoid a loss on its income statement. I continued to ask questions and seek answers, primarily

from former coworkers in the Global Finance group or in the busiVerDate 03-FEB-2003 08:49 Sep 29, 2005 Jkt 088896 PO 00000 Frm 00015 Fmt 6601 Sfmt 6601 D:\DOCS\88896.TXT SSC1 PsN: SSC1
12

ness units that had hedged assets with Raptor. I never heard reassuring explanations.

I was not comfortable confronting either Mr. Skilling or Mr.

Fastow with my concerns. To do so, I believed, would have been a

job-terminating move.

On August 14, 2001, I was informed of Mr. Skilling’s sudden resignation and felt compelled to inform Mr. Lay of the accounting

problems that faced him. I sent Mr. Lay an anonymous letter on

August 15, 2001, in response to a request for questions for an upcoming all-employee meeting to be held August 16 to address Mr.

Skilling’s departure. At the all-employee meeting, Mr. Lay commented that our vision and values had slipped and that any employee who was truly concerned about anything at Enron, please

bring those concerns to him or any number of the top management,

including Cindy Olson, Steve Kean, and others.

On August 16, I met with Ms. Olson to show her a copy of the

letter and discuss it with her. She encouraged me to meet with Mr.

Lay personally. Since Mr. Lay was traveling for the rest of the

week, she said the meeting would probably take place the week of

August 20.

I met with Mr. Lay on the afternoon of Wednesday, August 22,

2001. The meeting lasted just over one-half hour. I provided him

with memos I had drafted to help explain the problems facing the

company. Additionally, I provided an analysis of the Raptor entity

economics and a presentation prepared by Enron’s risk assessment

and control group.

I primarily used the memo titled ‘‘Summary of Raptor Oddities’’

as talking points with Mr. Lay. My main point to Mr. Lay was that

by this time Raptor owed Enron in excess of $700 million under

certain hedging agreements. My understanding was that the

Raptor entities basically had no other assets aside from these hedging activities. Therefore, they had collectively lost over $700 million. I urged Mr. Lay to find out who lost that money. If he discovered that the loss would be borne by Enron shareholders via an

issuance of stock in the future, then I thought we had a very large

problem on our hands.

I gave Mr. Lay my opinion that it is never appropriate for a company to use its stock to affect the income statement.

At the conclusion of the meeting, Mr. Lay assured me that he

would look into my concerns. I also requested a transfer as I was

uncomfortable remaining as a direct report to Mr. Fastow.

I fully expected Mr. Lay to conduct a thorough investigation into

my concerns. I was disappointed that such was not the case. I was

incredibly frustrated with Mr. Lay’s actions or lack thereof. I believed that Enron had a brief window to salvage itself this last fall,

and we missed that opportunity because of Mr. Lay’s failure to recognize or accept that the company had manipulated its financial

statements.

I intend to fully cooperate with this Committee and welcome the

opportunity to answer any questions the Senators may have.

[The prepared statement of Ms. Watkins follows:]

13

PREPARED STATEMENT OF SHERRON WATKINS,

VICE PRESIDENT OF CORPORATE DEVELOPMENT, ENRON CORP.

Good Morning Mr. Chairman, Members of the Committee. I am Sherron Watkins.

Thank you for the opportunity to address the Committee this morning.

BACKGROUND

I am currently employed by Enron Corporation as a Vice President. By way of

background, I hold a master’s degree in professional accounting from the University

of Texas at Austin and have been a certified public accountant since 1983.

• I began my career in 1982 at Arthur Andersen as an auditor. I spent 8 years

at Andersen in both the Houston and New York offices.

• I joined New York-based MG Trade Finance in 1990 to manage their portfolio

of commodity-backed finance assets—a position I held until October 1993.

• In October 1993, I was hired by Mr. Andrew Fastow and moved back to Houston to manage Enron’s newly formed partnership with CalPERS, the California Public Employee Retirement System. The partnership was called the Joint Energy Development Investments Limited Partnership or JEDI. I held the JEDI portfolio management position until the end of 1996.

• From 1997 until early 2000, I worked for Enron International, working primarily in the mergers and acquisitions group, which is also known as the corporate

development group.

• In early 2000, I transferred to Enron Broadband Services where I worked until

early June of 2001 in a variety of roles.

• In mid to late June of 2001, I went to work directly for Mr. Fastow, assisting

in the corporate development work that had been put under his supervision after

Cliff Baxter retired in May of 2001. I worked for Mr. Fastow in this new role until

late August 2001.

• I have since been reassigned into the human resources group with a variety of

assignments.

DISCOVERY OF RAPTOR PROBLEMS

• While working for Mr. Fastow in 2001, I was charged with reviewing all assets

that Enron considered for sale and determining the likely economic impact of a sale.

As part of the sale analysis I reviewed the estimated book values and market values

of each asset.

• A number of assets were hedged with an entity called Raptor. Any asset that

was hedged should, for the most part, have a locked-in sales value for Enron. Meaning that despite current market prices, Enron should realize the hedged price with

Raptor.

• It was my understanding that the Raptor special purpose entities were owned

by LJM; the partnership run by Mr. Fastow.

• In completing my work, certain Enron business units provided me with analyses that showed certain hedged losses incurred by Raptor were actually coming

back to Enron. The general explanation was that the Enron stock backstopping the

Raptor hedge had declined in value such that Raptor would have a shortfall and

would be unable to fully cover the hedge price that it owed to Enron.

• I was highly alarmed by the information I was receiving. My understanding as

an accountant is that a company could never use its own stock to generate a gain

or avoid a loss on its income statement. I continued to ask questions and seek answers, primarily from former co-workers in the Global Finance group or in the business units that had hedged assets with Raptor. I never heard reassuring explanations.

EVENTS LEADING TO MY MEMOS TO MR. KENNETH LAY

• I was not comfortable confronting either Mr. Skilling or Mr. Fastow with my

concerns. To do so, I believed would have been a job terminating move.

• On August 14, 2001, I was informed of Mr. Skilling’s sudden resignation and

felt compelled to inform Mr. Lay of the accounting problems that faced Enron.

• I sent Mr. Lay an anonymous letter on August 15, 2001 in response to a request

for questions for an upcoming all-employee meeting to be held August 16th to address Mr. Skilling’s departure.

• At the all-employee meeting Mr. Lay commented that our visions and values

had slipped and that if any employee was truly troubled by anything at Enron,

please bring those concerns to him or any number of the top management including

Cindy Olson, Steve Kean and others.

14

• On August 16th, I met with Ms. Olson to show her a copy of the letter and discuss it with her. She encouraged me to meet with Mr. Lay personally. Since Mr.

Lay was traveling through the rest of the week, she said the meeting would probably take place the week of August 20.

• I met with Mr. Lay on the afternoon of Wednesday, August 22, 2001. The meeting lasted just over one-half hour. I provided him with memos I had drafted to help

explain the problems facing the company. Additionally, I provided an analysis of the

Raptor entity economics and a presentation prepared by Enron’s risk assessment

and control group.

• I primarily used the memo titled Summary of Raptor Oddities as talking points

with Mr. Lay. My main point to Mr. Lay, was that by this time, Raptor owed Enron

in excess of $700 million under certain hedging agreements. My understanding was

that the Raptor entities basically had no other business aside from these hedges;

therefore they had collectively lost over $700 million. I urged Mr. Lay to find out

who lost that money. If he discovered that this loss would be borne by Enron shareholders via an issuance of stock in the future, then I thought we had a large problem on our hands.

• I gave Mr. Lay my opinion that it is never appropriate for a company to use

its stock to affect the income statement.

• At the conclusion of the meeting, Mr. Lay assured me that he would look into

my concerns. I also requested a transfer as I was uncomfortable remaining as a direct report to Mr. Fastow.

• I fully expected Mr. Lay to conduct a thorough investigation into my concerns.

I was disappointed that such was not the case. I was incredibly frustrated with Mr.

Lay’s actions or lack thereof. I believe that Enron had a brief window to salvage

itself this past fall and we missed that opportunity because of Mr. Lay’s failure to

recognize or accept that the company had manipulated its financial statements.

I intend to fully cooperate with the Committee and welcome the opportunity to

answer any questions the Senators may have at this time.

Senator DORGAN. Thank you, Ms. Watkins.

Next we will hear from Mr. Jeffrey McMahon, the President and

Chief Executive Officer of Enron. Good morning. Excuse me, the

President and Chief Operating Officer. I should not elevate you at

this hearing.

STATEMENT OF JEFFREY MCMAHON, PRESIDENT AND CHIEF

OPERATING OFFICER, ENRON CORPORATION

Mr. MCMAHON. Good morning, Mr. Chairman and Members of

the Committee. My name is Jeff McMahon. I am currently the

President and Chief Operating Officer of Enron Corp. I have been

an employee of Enron since 1994. From late October of last year

until early this month, I served as Chief Financial Officer of the

company. Before that, I was President and Chief Executive Officer

of Enron’s Industrial Markets Group. From 1998 until March 2000,

I was the Treasurer of Enron Corp. Before that, I served as Chief

Financial Officer of its European Operations.

As the Committee knows, earlier this month I was named President and Chief Operating Officer, at the same time that Steve Cooper was named the new interim Chief Executive Officer and Chief

Restructuring Officer of the company. As part of the new management team at Enron, my focus is on the future—the future of the

business, the future of our nearly 20,000 existing employees worldwide who are looking for continued employment, the future of our

over 8,000 retirees who are looking for continued retirement benefits from the company, and the various other stakeholders, including our creditors and former employees who have an interest in

Enron’s future.

Working closely with the Board of Directors and the Creditors

Committee, we are developing a restructuring plan designed to

15

bring the company out of bankruptcy and preserve value for the

company’s creditors, employees, and stakeholders. I believe that

Enron can emerge from bankruptcy by returning to its roots. As

Mr. Cooper expressed at the announcement of his appointment as

interim CEO, a reorganized Enron will be dedicated primarily to

the movement of natural gas and the generation of electricity related to gas assets that Enron currently owns.

With respect to the issues the Committee is examining, as the

Chairman knows, I’ve been fully and freely cooperating with this

and other congressional committees in this matter, and I welcome

today’s opportunity to answer, to the best of my ability, questions

the Committee may have about past events at Enron or our future

direction.

Thank you, Mr. Chairman.

[The prepared statement of Mr. McMahon follows:]

PREPARED STATEMENT OF JEFFREY MCMAHON, PRESIDENT AND CHIEF OPERATING

OFFICER, ENRON CORPORATION

Good morning. Mr. Chairman and Members of the Committee, my name is Jeff

McMahon. I am currently the President and Chief Operating Officer of Enron Corp.

I have been an employee of Enron since 1994. From late October of last year until

early this month, I served as Chief Financial Officer of the company. Before that,

I was President and Chief Executive Officer of Enron’s Industrial Markets Group.

From 1998 until March 2000, I was Treasurer of Enron Corp. Before that, I served

as Chief Financial Officer of its European Operations.

As the Committee knows, earlier this month I was named as President and COO,

at the same time Stephen Cooper was named the new interim Chief Executive Officer of the company. As part of the new management team at Enron, my focus is

on the future—the future of the business, the future of our nearly 20,000 existing

employees worldwide who are looking for continued employment, the future of our

over 8,000 retirees who are looking for continued retirement benefits from the company, and the various other stakeholders, including our creditors, who have an interest in Enron’s future.

Working closely with the Board of Directors and the Creditors Committee, we are

developing a restructuring plan designed to bring the company out of bankruptcy

and preserve value for the company’s creditors, its employees and its stakeholders.

I believe that Enron can emerge from bankruptcy by returning to its roots. As Mr.

Cooper expressed at the announcement of his appointment as new interim CEO, our

reorganized business will be dedicated primarily to the movement of natural gas

and the generation of electricity.

With respect to the issues the committee is examining, as the Chairman knows,

I have been fully and freely cooperating with this and other congressional committees in this matter. I welcome today’s opportunity to answer, to the best of my ability, questions the committee may have about the past events at Enron or our future

direction.

Thank you, Mr. Chairman.

Senator DORGAN. Mr. McMahon, thank you very much.

It is my understanding that a vote has just started on the floor

of the Senate. I think we would be advised to take a 15-minute recess. There is only one vote. Members of the Committee will be

able to vote and come back and reconvene immediately.

The hearing will stand in recess for 15 minutes.

[Recess from 10:05 a.m. to 10:20 a.m.]

Senator DORGAN. The hearing will reconvene and come to order.

Senator Snowe, you were not here when we did opening statements. We attempted to limit them to one minute. Let me recognize you before I recognize Mr. Skilling.

16

STATEMENT OF HON. OLYMPIA J. SNOWE,

U.S. SENATOR FROM MAINE

Senator SNOWE. I thank you, Mr. Chairman, and I ask to include

my entire statement in the record.

Senator DORGAN. Without objection.

Senator SNOWE. Given the unprecedented collapse of Enron, resulting in the largest bankruptcy in the history of this country, and

given the impact that it has had on dedicated and trusted employees who lost their 401(k) savings at the same time many officials

at the top levels of the company were enriched, and given the impact on investors who were led astray, it is certainly appropriate

that we continue to conduct these hearings.

Hopefully, these hearings will lead closer to the truth. We certainly do not know whether it will or not. But I do know this: I

wish there had been more Ms. Watkins and Mr. McMahon in the

organization, because it might have well prevented this catastrophic demise of one of the largest companies in America.

There are many plausibility issues here, Mr. Skilling, and I hope

that you will address them today. As I said when Mr. Lay was before this Committee several weeks ago, there is a plausibility gap

between the facts as we know them and the assertions and the denials that have been made by many of you at the top of this company. Many of those conflicts are not inconsequential when we are

talking about contradictions and inconsistencies. Many of those

have been underscored by the Powers Report.

So I hope that we will be able to be in a position here today to

begin to clarify many of these issues, because clearly, accountability and responsibility does rest with those at the higher levels

of the company. Certainly that does start with you in the time period that you were CEO.

Thank you, Mr. Chairman.

[The prepared statement of Senator Snowe follows:]

PREPARED STATEMENT OF HON. OLYMPIA J. SNOWE, U.S. SENATOR FROM MAINE

Thank you, Mr. Chairman, for holding this hearing today. I would also like to

thank Ms. Watkins, Mr. McMahon, and Mr. Skilling for appearing before us after

testifying in the House on separate occasions previously.

As I noted at the February 12 hearing when former Enron CEO and Chairman

Ken Lay invoked the Fifth Amendment and declined to testify, the fall of the colossal Enron enterprise is not a run-of-the-mill business bankruptcy. A company that

once boasted over $100 billion in revenues rapidly disintegrated into bankruptcy losing $67 billion in investor money and nearly $1 billion in the retirement plans of

its own loyal employees.

Given this unprecedented collapse and the impact it has had on dedicated employees and misinformed investors alike, the American people have a great many questions—and it is our obligation to try to get to the bottom of what went wrong. The

testimony of today’s witnesses will hopefully provide us with some of these answers—and, in the process, provide us with insight on how to prevent a repeat performance of this tragedy in the future.

As we turn to our witnesses, I would first like to commend Ms. Watkins for her

bravery in bringing her concerns to the attention of Mr. Lay in August, and for not

mincing words in warning him that Enron could ‘‘implode in a wave of accounting

scandals.’’ Given that her concerns proved prescient, I look forward to hearing more

about her role in informing Ken Lay of the accounting indiscretions occurring in Mr.

Fastow’s Finance department, and the subsequent actions that were taken in response to those concerns.

I also look forward to hearing the testimony of Mr. McMahon who, as far as we

know, was the first to approach Jeff Skilling about his serious concerns with the

17

conflict of interest presented by Mr. Fastow’s involvement with the LJM partnerships. Given that the LJM partnerships accounted for at least 40 percent of Enron’s

reported pre-tax income by 2000, I look forward to learning more about Mr.

McMahon’s meeting with Mr. Skilling.

Finally, because accountability and responsibility starts at the top, Mr. Skilling’s

testimony is of particular interest—especially when considering that he resigned

from Enron shortly before its collapse and claims no knowledge of the financial dealings that brought Enron down. I believe it is incumbent upon the former COO and

CEO to prove the validity of his claims given the conflicting findings of the Powers

Report and other witnesses, conflicts that are not inconsequential.

For instance, during his testimony before the House Energy and Commerce Subcommittee on Oversight and Investigations, Mr. Skilling stated that he was ‘‘not

aware of any financing arrangements designed to conceal liabilities or inflate profitability.’’ However, the Powers Report—in reviewing the minutes of the May 1, 2000,

Board meeting attended by Mr. Skilling—found notes indicating that the Board and

Enron management were aware that Raptor I was not a true economic hedge and

that it did not ‘‘transfer economic risk but transfers profit and loss volatility.’’ Isn’t

this a method of masking debts that really do exist while creating profits that don’t

exist?

In addition, as outlined earlier, Mr. Skilling seemingly ignored the concerns of

Enron Treasurer Jeff McMahon during a meeting on March 16, 2000. And not only

were his conflict of interest concerns ignored, but shortly after the meeting, Mr.

McMahon was transferred to a post in the company where he would have no contact

with Andrew Fastow and his partnerships. Was that just a coincidence or a sinister

effort to push aside one who dared question the financial structure that ultimately

brought Enron down?

Furthermore, Mr. Skilling essentially claimed to not be fully aware of Mr.

Fastow’s dealings with the LJM partnerships despite the fact that controls were

specifically put in the place by the Board of Directors and management to ensure

that Mr. Fastow’s allegiance to Enron—and not his own personal financial gains—

remained foremost.

The bottom line is that Mr. Skilling’s explanation of events—while perhaps convenient for his purposes—lacks plausibility given the conflicting findings and statements of others. Hopefully today’s hearing will bring us closer to the truth in terms

of what Mr. Skilling knew and when he knew it—and ultimately bring us closer to

unraveling the tragic events that unfolded at Enron so that they are never repeated

again.

Thank you, Mr. Chairman.

Senator DORGAN. Senator Snowe, thank you.

Senator Nelson, we allowed one minute for opening statements.

Do you have a statement?

STATEMENT OF HON. BILL NELSON,

U.S. SENATOR FROM FLORIDA

Senator NELSON. Mr. Chairman, I would like to continue with

my interest in finding out what happened to many of these state

pension funds around the nation. That will be part of my line of

questioning, particularly the fact that the Florida pension fund

bought almost 3 million shares during a 3-week period while the

stock was dropping like a rock, whereas the money manager, Alliance Capital Management that had handled other pension funds—

for example, New York—sold their Enron shares in August, but

were purchasing shares for the Florida retirement fund starting on

October 22 in that 3-week period, just extraordinarily defying logic.

So, I will follow up with that at the appropriate time.

Thank you, Mr. Chairman.

Senator DORGAN. Senator Nelson, thank you.

Mr. Skilling, why do you not proceed, and would you introduce

your counsel as well.

18

STATEMENT OF JEFFREY SKILLING, FORMER CHIEF

EXECUTIVE OFFICER, ENRON CORPORATION; ACCOMPANIED

BY BRUCE HILER, ESQ., O’MELVENY & MYERS

Mr. SKILLING. Yes, Mr. Chairman. This is my counsel, Mr. Bruce

Hiler, who represents O’Melveny & Myers.

Should I go ahead?

Senator DORGAN. Please proceed.

Mr. SKILLING. Mr. Chairman, distinguished Senators: My name

is Jeff Skilling. I worked at Enron for 10 years, spent my last 6

months there as CEO. I left the company in August of 2001.

The bankruptcy of Enron has been devastating to its employees,

its shareholders, and many others who were connected in one way

or another to this once-fine institution. As I did when I appeared

before Congress, I want to apologize to all of those affected people

for what Enron has come to symbolize. I know that no words can

repair the harm that has been done and, as hard and as difficult

as these past few months have been for me and my family, I know

that many others have suffered far, far worse.

I am here today to do my best to help answer the legitimate

questions on everyone’s mind regarding what happened at Enron.

Let me begin with a recap of what I understand about what Enron

has said in recent SEC filings.

First, there has been a restatement of three items, none of which

affected cash-flow or future period earnings. Second, there may

have been self-dealing by a small number of executives, among

whom I have not and cannot be counted.

But, in addition to those statements, there is also a raft of currently unproven assertions of additional accounting issues, the primary ones relating to something called the Raptor hedges. What do

we know about these hedges? We know that the company’s accountants, Arthur Andersen, agreed with the treatment of these

transactions all the way up to their technical group in Chicago. We

also know that the Powers team hired another accountant that apparently disagrees with Andersen, and I take it also that Ms. Watkins also disagrees with Andersen.

If the focus of this hearing is a game of dueling accountants, I

will state right now that I am not an accountant and probably have

little to add to that debate between experts.

I know that you will be asking questions about who did what at

Enron, but I hope in addition to those technical issues you will also

ask about how a company as strong as Enron can be bankrupted

by what I call a run on the bank. I have some thoughts that I think

a number of you have asked for that might be helpful and are important to the financial system.

But before we start, there are a few things I think this record

should reflect. I will not respond to all the outrageous things said

about me in this process because some have been so silly that they

merit no response. Three others, however, do merit a response:

First, I have not lied to the Congress or anyone else about my

recollection of events while I was at Enron.

Second, I never duped Ken Lay. I heard Ms. Watkins testify to

her opinion. I have no idea what the basis is for that opinion.

Third, I do not believe that my testimony is contradicted by or

is materially different than the testimony of either Mr. McMahon

19

or Mr. Mintz, for both of whom I have a tremendous amount of respect.

And now, finally, a few observations about this congressional

process to which I and others have been subjected. What has happened thus far, primarily in the House, should be cause for concern

of every American. The entire management and Board of Enron

has been labeled everything from hucksters to criminals, with a

complete disregard for the facts and evidence assembled. These

untruths shatter lives and they do nothing to advance the public

understanding of what happened at Enron. The framers of the Bill

of Rights are watching.

My dilemma, like that of other innocents called before these committees, is whether to take refuge in constitutional protections to

avoid your questions or stand on the constitutional presumption of

innocence to proclaim the truth.

I am here and prepared to answer the Committee’s questions because I have nothing to hide. I take and will continue to take full

responsibility for my actions as a senior executive of Enron Corporation.

While I worked at Enron, I served the shareholders and the

Board of Directors faithfully. When I left Enron on August 14, I did

not believe the company was in financial peril and I have no

knowledge of any—and had no knowledge, of any wrongdoing by its

employees.

Common decency suggests that I be treated as innocent until

proven otherwise. Common sense suggests that accusations made

now, before the facts are in, are likely to be wrong. Unfortunately,

neither common decency nor common sense will carry the day in

this politicized process.

I am nonetheless hopeful that today we can get past the rhetoric

and focus on the facts. Frankly, based on this morning’s opening

statements, I believe that we may actually have a constructive dialog today, and I hope that’s the case.

Mr. Chairman, unlike so many others so much less fortunate

than me, I am not a victim here. But also unlike others, I am not

one of the perpetrators, either. What I know I am prepared to tell.

What I do not know, I do not know either because it was kept from

me or it never happened at all, like so many of these supposed

facts thrown around since my hearings before the House subcommittee.

With that, Mr. Chairman, I’m prepared to answer your questions

to the best of my abilities.

Senator DORGAN. Mr. Skilling, thank you very much.

First let me say that decency and common sense will prevail

here. This also is a search for the truth, as I have indicated previously. The truth has proved to be rather elusive with respect to

what happened inside the corporation.

Mr. Skilling, you know that the Board of Directors commissioned

a study to examine what was happening inside the Enron Corporation. Mr. Powers testified before this Committee and said what the

Board of Directors found in the Powers study was ‘‘appalling.’’ That

seems to me to be at odds with your testimony, because your testimony suggests: ‘‘When I left, nothing really was happening, there

was nothing untoward that was happening inside the company.’’

20

That is, of course, at odds with what the Board of Directors of

the corporation itself found following your departure.

I am going to ask a series of questions, as will my colleagues,

and we want to try to understand what all three of you are saying.

All three of you were in this corporation for some length of time.

This corporation has effectively collapsed and filed for bankruptcy

and is now struggling to recover from that.

Let me ask a few questions. We will go around several times, and

we will have plenty of time.

Ms. Watkins, you said that you met with Mr. Lay for an hour

or about an hour, I believe, when you took to Mr. Lay your memorandum, which I have read a couple of times. That was a one-hour

meeting?

Ms. WATKINS. It was approximately a half-an-hour.

Senator DORGAN. A half-an-hour. Did you sense from that meeting that Mr. Lay knew what you were talking about? Did he get

it?

Ms. WATKINS. He certainly knew that I was concerned, that my

concerns were real. And I did feel at the end of the meeting that

he was going to conduct a thorough investigation.

Senator DORGAN. Ms. Watkins, you indicated in your memorandum, you talked about you are nervous that ‘‘we will implode

in a wave of accounting scandals.’’ The business world ‘‘will consider the past successes as nothing but an elaborate accounting

hoax.’’

Then when you testified before the House you said that the

transactions that you were concerned about here were pretty common knowledge within Enron. Tell me about common knowledge?

Would you believe that the upper echelon of Enron would know

what was happening with respect to the creation of these partnerships, including Mr. Skilling, Mr. McMahon, Mr. Lay, and others?

When you say common knowledge, would you describe that for us?

Ms. WATKINS. Throughout the Global Finance group, as well as

upper management, I believe it was well understood that the

Raptor entities were primarily backstopped with Enron stock. It

wasn’t a hidden fact. I do think certain people thought it was some

magic structure that was acceptable. But others that had some concerns about it kept their concerns mainly to themselves.

Senator DORGAN. When you say upper management, do you believe that would include Mr. Skilling?

Ms. WATKINS. Yes, I do.

Senator DORGAN. Yet Mr. Skilling testifies that he really did not

know much about this at all. I am going to go through a list of

Board meetings and so on at some later time.

But, we have a circumstance where you went to Mr. Lay with a

memorandum, a now famous memorandum. You said there are

very serious problems. The language you used is quite remarkable—‘‘accounting hoax,’’ ‘‘accounting scandals,’’ and so on. You say

‘‘common knowledge.’’ So do you believe that includes Mr. Lay? Obviously it includes Mr. Lay after you addressed him with respect

to the memorandum. Did it before that point, in your judgment?

Ms. WATKINS. During our meeting he recollected that the Raptor

structures had been presented to the Board. He believed that they

had been gone over in somewhat detail, that Arthur Andersen had

21

blessed them. And he asked me: ‘‘Are you certain there could be

something wrong with these structures?’’

My point to him was: ‘‘Yes, there is something wrong when an entity owes us $700 million, we have booked that in the income

statement, we have a receivable from that entity, and they’re going

to pay us back by cashing in our own stock.’’

Senator DORGAN. Mr. Skilling, were you aware of that structure?

We’re talking now about the structure. Were you aware of that

structure?

Mr. SKILLING. Yes. I was in the Board meeting that Ms. Watkins

talked about in May of 2000 when the Raptor transaction was presented. In that Board meeting, there was a relatively detailed description of the transaction, including a motion that would essentially approve or set up the original Raptor transactions, and that

was approved by the Board of Directors.

Senator DORGAN. Is it your contention that that structure was

appropriate, inasmuch as Ms. Watkins and others and those of us

in Congress now see that what was backstopping that partnership

was Enron stock? Is it your contention that you knew of it, and it

was appropriate?

Mr. SKILLING. I relied on our accountants, who, in fact, I believe

it’s very clear—I’ve seen the minutes of that Board meeting, and

it’s very clear that Mr. Rick Causey, who was the Chief Accounting

Officer of the company, represented that Arthur Andersen and our

lawyers had taken a very hard look at this structure, and they believed it was appropriate.

Senator DORGAN. So you’re saying that Arthur Andersen informed the top executives of the corporation that this was an appropriate structure? You knew about it, therefore, believed it was

okay because your accountants said it was all right; is that the

case?

Mr. SKILLING. The structure was presented to the Board of Directors. Mr. Causey said the accountants had looked at it and had

signed off on it, and the Board approved that structure.

Senator DORGAN. I am going to go into a different direction, then

I will come back, and we will have several rounds of questions.

Could you move the microphone just a bit closer.

Mr. SKILLING. Yes, sir.

Senator DORGAN. I want to talk about some things I think you

have said that you did not know about. You say you did know

about that structure. Disclosures about Mr. Fastow are interesting

and also I think lead to the use of the word ‘‘appalling’’ in the Powers Report. Mr. Fastow has an equity position in partnerships,

makes $30 million in commissions, invests $25,000 and 60 days

later takes out $4.5 million. It seems to be a corrupt system.

I am wondering, did you know about what Mr. Fastow was doing

with respect to the creation of these partnerships, his stake in

those partnerships, and what he was doing with respect to the personal financing?

Mr. SKILLING. All my recollection is that a lot of issues related

to LJM2 and LJM1, which were affiliated party transactions, were

discussed in depth at the Board of Directors meeting, including the

issue that there would be a potential conflict of interest created by

having Mr. Fastow participate in that, in those partnerships, and

22

it was believed that the controls that were approved and put in

place for LJM2 would eliminate that conflict of interest.

LJM1 was a little bit different in that the actual transaction, the

hedging transaction, was approved, so there was no ongoing issue.

That transaction was approved based on a fairness opinion that

had been received from an accounting firm, that they said this was

a reasonable transaction for Enron Corporation. So I and the other

Board members believed that was adequate protection for our

shareholders and approved it.

Senator DORGAN. Are you surprised by what you have since

learned about Mr. Fastow’s compensation?

Mr. SKILLING. I can only tell you what I know. I have read a tremendous amount. I have read conflicting things in the newspapers.

To the extent that the compensation was as some newspapers have

published, of that order of magnitude, yes, I was surprised.

Senator DORGAN. Let me just ask a brief question of Mr.

McMahon. Then I am going to come back on a second round and

ask a series of questions of Mr. Skilling and Ms. Watkins.

Mr. McMahon, you are currently employed by the Enron Corporation. We know that there has been shredding of documents

going on at the Enron Corporation. Can you tell me what records

were destroyed, what kind of internal investigation has been conducted, and what should we learn about and what should we know

about the records that were destroyed?

Mr. MCMAHON. Currently, I don’t believe we do know what

records are destroyed. We, as I understand it, have cooperated fully

with the FBI, who has come in and done some work in the building, interviewed a lot of our employees who were on the floors

where this shredding may have occurred. As I understand it, our

internal legal counsel and external legal counsel are also looking

into the document shredding allegations.

So at this point, we don’t know exactly the outcome of that. We

have secured the building, though, as soon as we were made aware

of it, so the shredders were secured and were removed from the

building. Prior to that, the legal group, as soon as the investigations began, sent out many emails to all employees requesting

them to retain and protect documents.

Senator DORGAN. Mr. McMahon, Mr. Skilling said that he has

great respect for you. It is the case, is it not, that you went to Mr.

Skilling to express your concerns about what was happening inside

the corporation?

Mr. MCMAHON. Yes, it was. In March 2000, I had a conversation

with Mr. Skilling.

Senator DORGAN. What was the response to that conversation?

Can you describe the conversation generally and tell us what the

response was?

Mr. MCMAHON. Generally, at the time—and let me step back and

kind of give you the perspective of the organization.

I was, at that point in time, Treasurer of Enron Corp., and I was

reporting to the then-Chief Financial Officer, Mr. Fastow. There

were two groups reporting to Mr. Fastow at the time. My group

was one and then Mr. Cooper’s group, which was responsible for

structured financing. In that fell the LJM partnerships which Mr.

Fastow was a principal in.

23

The short of it is the conflict of interests, as Mr. Skilling just described, manifested themselves in my area on a daily basis, where

we had Enron employees negotiating on behalf of Enron and LJM

to do transactions, and it was causing some problems internally

within the organization. So after many meetings with Mr. Fastow

and many meetings with other members of senior management, I

felt that I needed to talk to Mr. Skilling about those conflicts and

how I saw that they should be fixed.

Senator DORGAN. So you took your concerns to Mr. Skilling.

What happened as a result of that?

Mr. MCMAHON. We had about a 30-minute meeting, as I recall,

and Mr. Skilling listened intently to my concerns, and at the end

of the meeting he indicated to me that he would remedy the situation and fix the problems.

Senator DORGAN. Did you lose your job as corporate treasurer

shortly thereafter?

Mr. MCMAHON. About two or three weeks later, I was offered a

job internally to move to a different group.

Senator DORGAN. Do you think it was a result of your meeting

with Mr. Skilling?

Mr. MCMAHON. Certainly at the time I did not have that view.

I had been approached around the same time by the then-head of

that division, who asked to recruit me in there, and I ultimately

turned it down. But shortly after meeting with Mr. Skilling, I did

have a meeting with Mr. Fastow, who was then my boss, who indicated to me that he had spoken to Mr. Skilling about our conversation and he was concerned whether we could actually work together again. So when that opportunity did arise, I did ultimately

take it.

Senator DORGAN. But I mean, you are trying to put an awfully

good face on this. It appears to me that you went to Mr. Skilling

and said there are real problems here and the result is you were

transferred. Do you disagree with that?

Mr. MCMAHON. I think that’s a correct statement of the facts. I

certainly don’t have any knowledge that that was a direct result of

that meeting.

Senator DORGAN. Mr. Skilling, do you recall that meeting when

Mr. McMahon came to you and said there are serious problems?

Mr. SKILLING. Mr. Chairman, I remember the meeting with Mr.

McMahon, yes.

Senator DORGAN. And do you remember the meeting the same

way Mr. McMahon describes it?

Mr. SKILLING. Well, you know, everybody—when you have two

people that are in the same meeting, each will have a somewhat

different recollection. This was about two years ago. It was my

recollection that when Jeff came in, there was a concern about the

conflict leading to an impact on compensation, and I’ve stated that

before. I’ve stated that in the House.

And I mean that in no way in a derisory way to Mr. McMahon.

He was raising an issue, his concern about compensation, because

of this structural conflict issue that we had. As you know, we had

procedures within the Board that the Board had approved to eliminate what we believed was the conflict of interest. When Jeff came

to me, he was suggesting that he needed my support to ensure

24

that, in addition to the procedures that were in place, he would

need my support to ensure that he was not damaged by this conflict.

It’s my recollection that I assured him very strongly, very strongly, that I was totally on his side and that the way compensation

was determined at Enron Corporation, it was determined by something called a performance review committee, and there are typically 24 people on the performance review committee. And I said,

if Mr. Fastow is concerned, there will be 23 people in that room

that are cheering you on, and I said it will not impact and I support you in your compensation.

Senator DORGAN. Well, Mr. Skilling, it seems to me that what

Mr. McMahon is saying about that day is at odds with what you

are saying when you say: I left that company, I had no idea there

was anything going on that was a problem. It appears to me Mr.

McMahon said he came to talk to you about these problems, and

you are taking us off into a compensation issue. I understand that.

But we need to get to the bottom of it. I’ll come back around with

a whole series of questions, but it seems to me that this is at odds

with what Mr. McMahon said the meeting was about. If Mr.

McMahon, in fact, did represent these problems to you, I would like

very much for you to tell the Congress: I was aware of them and

did nothing. If that is the case, let us hear that.

Mr. SKILLING. Mr. Chairman, I absolutely disagree with that. I

think——

Senator DORGAN. You disagree with Mr. McMahon?

Mr. SKILLING. Sir?

Senator DORGAN. You disagree with Mr. McMahon’s statement?

Mr. SKILLING. No, I disagree with your statement, if you said

that I heard that there were issues and did nothing about them.

What I did in my recollection is I absolutely told Jeff that I would

support him, as he asked. And I believe—actually, I didn’t even remember this until the testimony in the House, I guess it was the

testimony in the House, where Mr. McMahon mentioned that Joe

Sutton visited him after that. I think I kind of vaguely recollect

going to Joe and saying: ‘‘Can you please go in there and make

sure that this is all taken care of?’’

I actually vaguely remember also going to Mr. Fastow and putting him on notice that there was an issue here and asking him

to do what he needed to do to ensure that this was not a problem

for Jeff.

Senator DORGAN. I will inquire further about that.

Senator McCain.

Senator MCCAIN. I want to thank the witnesses for being here.

Ms. Watkins, you have described Mr. Skilling as an intense,

hands-on manager and testified before the House Energy and Commerce Committee that he was aware of the Raptor transactions. Is

it possible, in your view, that Mr. Skilling was not aware of the accounting improprieties of the partnerships that led to the collapse

of Enron?

Ms. WATKINS. In my opinion, Mr. Skilling was aware of the problems. It was—the Raptors had to be restructured the first quarter

of 2001, his first quarter as CEO. The Powers Report highlights

that several people recollect that Mr. Skilling was putting this as

25

one of his highest priorities and had various individual meetings

with people to see about that restructuring.

I’m certain that Mr. Skilling is right when he says he’s not an

expert on accounting matters. However, he did always look to the

market as a checkpoint—rationale—to determine what we were

doing. I think, in my opinion, he would be very aware that the

hedges that we were achieving with Raptor could not have been

achieved with an unrelated outside third party.

Senator MCCAIN. Mr. Skilling, I would be glad to give you an opportunity to respond to that statement by Ms. Watkins.

Mr. SKILLING. As I’ve said, I was familiar with the Raptor transaction as it was approved by the Board of Directors and understood

in the terms that were presented to the Board of Directors how

that transaction operated. I believed, based on the representations

of our accountants, that this was an entirely appropriate structure.

And I think there’s a representation in the minutes very clearly to

that effect.

When Ms. Watkins talks about a restructuring, or the fact that

what I knew or didn’t know, my only recollection of the restructuring of the Raptors is that I was told that they were restructuring the Raptors. I asked if the accountants had signed off on it,

if it looked okay, and I was told that it was and went along with

it.

Senator MCCAIN. Was it your responsibility to know?

Mr. SKILLING. Sorry?

Senator MCCAIN. Was it your responsibility to know?

Mr. SKILLING. As I said, Senator, I am not an accountant. These

are highly, highly—I think if you’ll look in the October minutes at

the structure of Raptor, this is a complex, complex structure, and

it took, I think, quite some time for Arthur Andersen. As I recall,

this was even taken to the Arthur Andersen technical group in Chicago because it was so technical. And they signed off and said that

they thought this was an appropriate accounting treatment.

Senator MCCAIN. I’d like to move to the issue of broadband. Are

you familiar with Mr. Scott Bolton? He was the manager of government relations.

Mr. SKILLING. I’m sorry, I don’t recall him.

Senator MCCAIN. Well, on March 9, Blockbuster and Enron officially called off their movie-on-demand partnership. Do you recall

that?

Mr. SKILLING. I don’t recall the exact date, but I do recall the

Blockbuster transaction unraveling, yes, sir.

Senator MCCAIN. And you remember that the stock price

dropped after that?

Mr. SKILLING. I’d have to go back and look, but that’s probably

right, yes.

Senator MCCAIN. At the Board meeting on March 16 following

the March 9 calling off of the partnership with Blockbuster, you

noted that analysts and portfolio managers in Boston had questioned you on the decline in the telecommunications market and

how it would affect Enron’s broadband business. You told the

Board that ‘‘the development of the business would be slower than

originally expected.’’ Do you recall that?

Mr. SKILLING. No, I don’t recall that specifically.

26

Senator MCCAIN. You do not recall that. About the same time,

according to Mr. Bolton, you flew to Portland, Oregon, to meet privately with Enron broadband executives and employees. You told

him the business ‘‘faced a ‘complete meltdown,’ ’’ Bolton recalled.

There was no demand for high speed internet services and prices

were plummeting. Do you recall that?

Mr. SKILLING. What was the date on that, sir?

Senator MCCAIN. Some time in March of 2001.

Mr. SKILLING. March of 2001. Yes, I recall a trip to Portland.

Senator MCCAIN. Do you recall saying that the broadband business faced a ‘‘complete breakdown’’?

Mr. SKILLING. I think the actual term that I used was that the

broadband industry, the high speed data interchange industry, was

facing a meltdown. At that time, we believed that that might have

been positive development for Enron, because as prices dropped we

believed there would be more capacity available to create a traded

market in bandwidth.

So we believed very strongly that, in fact, our entire strategy—

and people talked about our strategy in broadband—our strategy

was predicated on a bandwidth glut. We were a low or modest

asset investment strategy, assuming that we could create a market

and a tradeable market for broadband. So as this market price

started to decline late in the first quarter of 2001, quite frankly,

we thought that was a good sign.

Now, the other side—there were two sides of this. That was the

trading side of the business, the merchant side of the business. I

believed that that would be beneficial for the trading and merchant

side of the business. The content side of the business, which is

what you’re reacting to or asking about as it relates to the Blockbuster business, the reason the Blockbuster arrangement terminated was that Blockbuster was not able to get some of the content

that we thought that they would be able to provide us and we believed we could get that content more effectively by directly contacting the studios.

So it was our belief at that time that we would be able to get

the content; we just had to go direct to the studios rather than

working through Blockbuster.

Senator MCCAIN. And in New Orleans at the end of the month,

you said publicly that the broadband operation was going fullspeed, ‘‘pedal to the metal.’’

Mr. SKILLING. Yes, sir, and we believed very strongly that the

traded market, the market of creating a commodity market from

bandwidth, was progressing well, was progressing much——

Senator MCCAIN. Was that an accurate assessment?

Mr. SKILLING. The market was progressing much more quickly

than the electricity market that I had also been involved in the

starting of back in the mid-1990s. So I felt pretty good about the

rate of progress.

Senator MCCAIN. Has your good feeling been substantiated by

subsequent events as far as broadband is concerned?

Mr. SKILLING. No. Subsequent to that—in fact, in the next several months—this meltdown began to have some very, very serious

consequences for credit of counterparties in the marketplace. It got

27

to the point that you could not sign a long-term deal for bandwidth

because there were no creditworthy counterparties.

That is what hurt our business, and at that point we significantly retrenched, cut our capital budget by I believe 75 percent,

and began redeploying people. In fact, I believe Ms. Watkins, the

reason that she moved from the telecommunications business to

Mr. Baxter’s area is that we were trying desperately to move our

people out of the broadband business once we realized that there

was a serious credit problem there that we just really couldn’t contain.

Senator MCCAIN. I see that my time has expired, but I want to

point out that I understand you told the Board that business would

be slower than originally expected, then you went to Portland and

said that there would be a complete meltdown, but in New Orleans

you said the broadband operation was going full-speed ‘‘pedal to the

metal.’’

Mr. SKILLING. Mr. Senator——

Senator MCCAIN. I find those statements contradictory.

Mr. SKILLING. They’re not contradictory.

Senator MCCAIN. If I could finish before you respond. And certainly not in keeping with subsequent events, which prove your

statement about a complete meltdown throughout broadband was

far more accurate than ‘‘pedal to the metal.’’

Mr. SKILLING. Again, I don’t think that the concepts are inconsistent at all. We believed—in fact, you can go back further in time

and look at all of the representations that we made to analysts—

that our strategy in the broadband business was predicated on a

glut in bandwidth capacity. You can talk to anybody in the industry. We were the first people to talk about that.

There was a meltdown. Prices were collapsing, starting in kind

of that March timeframe, March of 2001. That we believed was exactly what we had predicted, exactly what we had projected, and

we thought that that would lead to the growth of the market.

We built the natural gas wholesale business at a time when gas

prices were plunging. We built the electric business at a time when

electricity prices were plunging. That is not at all inconsistent with

the view that we were going to aggressively build this wholesale

side of the business, because it was turning out the way we expected.

Now, subsequently, it went from a meltdown to—I don’t know

that anybody has seen in the history of business—I’m kind of a history of business buff. I’m not sure there has ever been an industry

in history that has experienced the change of fortunes that has occurred to the long distance fiber optic business in the last year-anda-half. That was unforeseen. It went a lot further. And we reacted

very quickly to it. By July, we began a significant—June, we began

a significant reduction in our capital budget and started moving

people as best we could out of that business into other growing

Enron businesses.

Senator MCCAIN. My time has expired. I thank you, Mr. Chairman. I thank the witness.

Senator DORGAN. Senator Fitzgerald.

Senator FITZGERALD. Thank you, Mr. Chairman.

28

*The information referred to has been retained in the Committee files.

Mr. Chairman, I have an advance copy of an article that is going

to be published in Vanity Fair magazine in their April 2002 edition. It is by Marie Brenner, and I am wondering if I could introduce this into the record. I would like to examine the witnesses

about this.

Senator DORGAN. Without objection.*

Senator FITZGERALD. Thank you.

Mr. McMahon, the article that I have just introduced in the

record describes some transactions that occurred within Enron

back in the late 1980s and it is my understanding that at that time

you were employed with the firm of Arthur Andersen. Is that correct?

Mr. MCMAHON. I’m not sure what time period you’re talking

about in the 1980s, but I was employed with Arthur Andersen from

I believe 1982 to 1988 or 1989, somewhere around there.

Senator FITZGERALD. Were you, while you were at Arthur Andersen, involved in an investigation into some misappropriated funds

at a company called Enron Oil?

Mr. MCMAHON. Yes, I was.

Senator FITZGERALD. According to Marie Brenner’s article in

Vanity Fair—and Marie Brenner is a Columbia University adjunct

professor—the issue with the company in 1987 involved the misappropriation of moneys by two traders at that Enron subsidiary,

Enron Oil, and that both the Enron auditors and the Arthur Andersen auditors who looked into the matter were in complete agreement. The auditors adamantly told Mr. Ken Lay that the two rogue

traders should be fired.

Is that your recollection, Mr. McMahon?

Mr. MCMAHON. My recollection of that—it’s quite some time

ago—I was a manager at Arthur Andersen on that subsidiary audit

of Enron, which was in New York. And my recollection is that we

found that the senior management of that organization had been

misreporting its trading activities to the parent in Houston, the

corporate parent. We did issue a report expressing the breakdown

of controls and the concerns we had. I don’t recall whether the report suggested that the senior management should be terminated,

but I believe they were terminated the day the problems were discovered, is my recollection.

Senator FITZGERALD. Well, this article claims that the auditors

recommended to Lay that the two rogue traders be fired and it was

instead decided that those involved would be kept on the Enron

payroll. They eventually wound up being convicted of various

crimes such as fraud and tax evasion and served jail time and probation time. According to a former Enron auditor quoted in the article, ‘‘Lay read the report and he read his budget and estimated

how much they, the two rogue executives, made and if they were

fired what he could lose. My conclusion was that this guy is a guy

who puts earnings before scruples rather than reacting to the dishonesty right in front of him.’’

But you, Mr. McMahon, you do not have any recollection of both

the Enron internal auditors and Arthur Andersen auditors recommending that the rogue traders be fired?

29

Mr. MCMAHON. My recollection, Senator, is that they were fired

as soon as the problems were discovered, because I spent most of

my year up in Valhalla, New York, that year, and the two top executives that were accused of this were not in the office.

Senator FITZGERALD. There was not any period of time that they

were kept on the payroll after it became clear that there had been

misappropriation of funds?

Mr. MCMAHON. Actually, I don’t know how long they were kept

on the payroll. They certainly were not operating out of that office

once the auditors got there.

Senator FITZGERALD. So you did not draw any conclusions about

Mr. Lay from that incident?

Mr. MCMAHON. No. I think our view at the firm at the time was

that this was, in fact, rogue traders who had violated a corporate

policy, and ultimately, that business unit was shut down by Enron,

as I recall, and rolled under another senior executive based in

Houston.

Senator FITZGERALD. Mr. Skilling, I appreciate your testifying

today. You made it quite clear in your testimony before the House

and again this morning that you were aware of no accounting improprieties and that you relied on the representation of Enron’s

auditors, Arthur Andersen, your accountants, in telling you that

the accounting was appropriate for the Raptors transactions. And

you were aware of the Raptors transactions, but you believed the

accounting was appropriate. Is that correct?

Mr. SKILLING. I was aware—yes, that is correct.

Senator FITZGERALD. Were you, on the other hand—leaving aside

whether the accounting was appropriate—were you aware that the

structure of the transactions entailed a degree of risk for Enron?

Mr. SKILLING. No, sir. What was presented to the Board and the

general concept, as I understand it, of the Raptors was that there

would be an entity established, there would be value put in the entity, we would attract third-party equity capital into that entity,

and that entity would write a derivative that would basically hedge

some of our high technology——

Senator FITZGERALD. What was your understanding of how the

Raptors were capitalized?

Mr. SKILLING. There was third-party equity from the outside.

Senator FITZGERALD. Entirely with third-party equity? That was

your understanding?

Mr. SKILLING. No, it was my understanding that there was some

Enron equity involved.

Senator FITZGERALD. What was the Enron equity?

Mr. SKILLING. I don’t know, sir.

Senator FITZGERALD. You didn’t know? You didn’t know what—

did Enron put its own stock into the Raptors?

Mr. SKILLING. I believe if you go back to the Board minutes

where it was approved, that would have laid out in detail what the

specifics——

Senator FITZGERALD. And you were aware Enron had issued its

own stock to the Raptors, were you not?

Mr. SKILLING. You cannot issue stock to the Raptors without

having approval of the Board of Directors, is my understanding.

Senator FITZGERALD. So you were aware of that?

30

Mr. SKILLING. If it’s in the minutes.

Senator FITZGERALD. You were aware that Enron had issued its

own stock. And they issued a lot of stock, did they not, to the

Raptors?

Mr. SKILLING. I don’t know, sir.

Senator FITZGERALD. Did you ever look into it?

Mr. SKILLING. As I said, I had no reason to think there was a

problem. My accountants and internal people told me that the

hedges were in place and good.

Senator FITZGERALD. If they had come to you and said they had

to double the amount of Enron’s allowable outstanding shares so

they could issue them all to the Raptors, would that have concerned you?

Mr. SKILLING. I think if they had come to me and said that, probably my first question would have been, is this okay, are the accountants okay with it? If they said it’s fine, I probably would have

said okay.

Senator FITZGERALD. So you did not see issuing stock as being

at all risky to capitalize the Raptors with even an unlimited

amount of Enron stock?

Mr. SKILLING. See it as risky? Quite frankly, as long as the accountants had told me that they thought this was an appropriate

structure, I felt comfortable with it.

Senator FITZGERALD. As long as the accounting was okay, you

weren’t concerned about risk? Risk is something different than the

accounting.

Mr. SKILLING. Well, no, sir. Senator, I think you can ask anyone,

you can ask everyone sitting at this table. If there was anybody

that was concerned about protecting the company against economic

risk, it was me. I absolutely was concerned about protecting the

company from risk.

Senator FITZGERALD. But you saw nothing risky in issuing even

an unlimited amount of Enron stock to these other entities?

Mr. SKILLING. I thought the transaction was an appropriate

transaction, Senator.

Senator FITZGERALD. I am not asking whether it is appropriate.

I am asking whether——

Mr. HILER. Senator, with all due respect. Senator, I am sorry. I

apologize for interrupting, but I do not think he has testified that

he did or did not see a problem with issuing an unlimited amount

of stock. He is trying to give you his best recollection, and he has

said that whatever the minutes reflect, he probably would have

heard. And I think he can tell you whether he has a recollection

of an unlimited amount of stock or a little stock or however much

stock was going to be issued, as long as he has a recollection of it.

Senator FITZGERALD. I just want to nail down: In your mind, was

it—not whether it was appropriate or not from an accounting

standpoint, but was it risky at all to issue Enron’s own stock to the

Raptors?

Mr. SKILLING. Again, it was my understanding that the purpose

and the function of the Raptors was to provide hedges for highly

volatile technology investments that we had made. So I believed

that we were reducing the risk to the company absolutely.

31

Senator FITZGERALD. Even though it was backed by Enron’s own

stock?

Mr. SKILLING. There was third-party equity involved as well,

Senator.

Senator FITZGERALD. But that was a small percentage, was it

not?

Mr. SKILLING. Again, I know what the concept was that was presented to the Board of Directors. I was not involved in the specific

negotiations of the structures, the pricing of the structures. I was

under the impression, as were many people in the company, as was

the Board of Directors, that this was a hedge of those highly volatile technology investments.

Senator DORGAN. Senator Wyden.

Senator WYDEN. Thank you, Mr. Chairman.

Mr. Skilling, in my opening statement I went through the barrage of warnings that you seem to have gotten from high-level insiders at Enron. I would like to ask some more about what happened after Mr. McMahon warned you. You said this morning that

you went to Mr. Fastow. Did you specifically in that conversation

with Mr. Fastow talk about the conflict of interest questions in the

partnerships that Mr. McMahon talked about?

Mr. SKILLING. Mr. Senator, you said that I’d received a bunch of

warnings. I don’t recall any of these being—the ones you mentioned, quite frankly—being in the form of a warning.

Senator WYDEN. All those people who said that they were warning you. Ms. Watkins—I went through——

Mr. SKILLING. Ms. Watkins did not talk to me, Senator.

Senator WYDEN. Well, Ms. Watkins said, and I quote here: ‘‘Ms.

Watkins said that Clifford Baxter told her that he met with you repeatedly to express his concern about the partnerships.’’

Mr. SKILLING. In my House testimony I’ve been very clear on my

recollection of the discussion that I had with Cliff. As I mentioned

in that discussion, Cliff had expressed—Cliff and Andy had a—they

didn’t like each other. They had a very strained personal relationship, and Cliff’s issue had nothing to do with the appropriateness

or inappropriateness of the transaction. It had everything to do——

Senator WYDEN. Let us talk about your conversation with Mr.

Fastow about whether conflicts of interest at the partnerships were

mentioned after Mr. McMahon came to you.

Mr. SKILLING. I’m sorry; say again?

Senator WYDEN. Were conflicts of interest discussed with Mr.

Fastow after Mr. McMahon came to you and raised those questions

specifically?

Mr. SKILLING. We discussed the conflicts of interest embedded in

LJM at virtually every Board meeting of the company, and most

of those were subsequent to that meeting. That was in March 2000.

That was very early in the process.

There were very few transactions in the LJM transaction or in

the LJM structure. So we had lots of discussions and they are documented in the Board of Directors meetings—minutes.

Senator WYDEN. Well, I am concerned because after Mr.

McMahon stated his concerns, you continued to put a lot of confidence in somebody who seems to be at the heart of the conflict

questions. I think what I would like to ask you is what did you see

32

in Mr. Fastow that made you have faith in him that he could resolve these questions and protect the interests of all concerned?

Mr. SKILLING. Senator, you can look at the minutes of the October 1999 Board meeting and Finance Committee meetings. We

dealt explicitly with the issue of conflict of interest created by the

LJM partnerships and put in place a system of controls to offset

those conflicts, and I felt comfortable, as did the Board, that those

conflict control mechanisms were in place.

Jeff raised a different issue in my mind. The issue was related

to how these conflicts of interest might impact compensation of people in his position. I assured Mr. McMahon that it would not impact his compensation, and I think subsequent to that, as I’ve mentioned—and again, I have only a general recollection of this—I believe I did talk to Mr. Sutton, who was Vice Chairman of the company, and asked him to look into the concerns, any other concerns

that Jeff had related to that. And I talked to Mr. Fastow and put

him on notice that there had been a complaint and that I expected

him to deal with it.

Senator WYDEN. Mr. McMahon, my understanding is that your

concerns went to conflicts of interest at the partnerships and not

just conflicts of interest involving this compensation issue. Could

you clarify that?

Mr. MCMAHON. The meeting I had with Jeff was—again as he

indicated, the Board had approved the conflict of interest existing.

My issue was really the process internally on how that conflict was

managed. You had the CFO of the company who had a personal interest in a partnership outside the company.

People who worked for him were negotiating both on behalf of

Enron and on behalf of the partnership, and it created not only a

conflict at the CFO level, but it created conflicts within the organization because that CFO had a very large impact on their compensation, on their promotion capabilities, et cetera, et cetera, et

cetera.

So that was my discussion with Mr. Skilling, was how that conflict between Mr. Fastow and his partnership manifested itself

within the day-to-day operations of the organization. So my issue

was process-driven more so than anything else, Senator.

Senator WYDEN. Do you want to respond to that, Mr. Skilling?

Because it seems to me that when Mr. McMahon brings you a fundamental issue about conflict you go to the person who has got the

biggest conflict.

Mr. SKILLING. I concur with what Jeff just said. He came to me

with a process issue and raised some issues about compensation.

I believe that I had resolved that by telling Jeff I would totally support him in the compensation issues related to this.

On the issues of people negotiating, or what I might call logistics

of the process—as Jeff said, he was concerned about the process—

again, I recall I spoke to Mr. Sutton, who was Vice Chairman of

the company, and asked him to get with Jeff and see if we could

deal with that. Now, in addition to that, I did go to Andy and put

Andy on notice that a problem had been raised and I expected the

controls to be operated effectively. That’s my best recollection of

what happened, Senator. I believed we addressed the problem.

33

Senator WYDEN. Now, in the meetings of the October 6 BoardFinance Committee discussion, Mr. Fastow discussed how to mitigate potential conflicts and ‘‘Messrs. Buy, Causey, and Skilling approve all transactions between the company and the LJM funds.’’

Did you approve all the transactions?

Mr. SKILLING. No, sir.

Senator WYDEN. Now, Jordan Mintz, an Enron lawyer, testified

that he tried to get you to sign approval sheets for the LJM deals

and reminded you that your signature was required. I understand

that you have said that you did not believe that your signature was

required; is that correct?

Mr. SKILLING. Well, you’ve asked a couple of questions there.

One question was what did Mr. Mintz say. Frankly, I don’t believe

that is Mr. Mintz’ testimony, so I’d like you to give it to me again.

Senator WYDEN. That was the testimony.

Mr. SKILLING. Can you give it to me again? Do you have a specific reference, sir?

Senator WYDEN. He testified that he tried to get you to sign approval sheets for the LJM deals and reminded you that your signature was required.

Mr. SKILLING. Do you want to—can we bring forward and pass

out to the Members of the Committee Mr. Mintz’s specific memo?

Also, Mr. Mintz had another memo, which I have seen subsequently. And by the way, I also thank the staff of the House committee, because I think they have done a pretty good job getting

documents, and it’s been interesting to see a lot of the documents.

But there are two memos from Mr. Mintz. The first one lays out

what the process is that the Board approved, and if you would like

a copy of that I’d like to send it to you.

Senator WYDEN. All right, let us do this, Mr. Skilling. Even if

you did not believe your approval was required——

Mr. SKILLING. My approval, Mr. Senator, was not required. In

the October 1999 Board minutes there is a very, very clear description of what the approval process is, and my name is not on it.

Now, subsequent to that, as Mister—and I think you’ll see it in

Mister—would you look at this, rather than——

Senator WYDEN. Sure.

Mr. SKILLING. This is an LJM approval process sheet. This is to

Messrs. Buy and Causey, March 8, 2001. So this is subsequent.

This is March 8, 2001, subsequent to the October Board meeting.

The title of this memo is ‘‘LJM Approval Process—Transaction Substantiation.’’ And this is from Jordan Mintz.

The thing says, and here’s what it says. They have an ‘‘Overview’’ and it says: ‘‘In order to address these three critical and overlapping concerns’’—the concerns basically related to conflicts of interest—‘‘the Board has previously approved the following procedures and controls.’’ Now, this is the head of Global Finance, legal:

Number 1: ‘‘Enron and LJM are not obligated to one another to

transact.’’

Number 2: ‘‘Enron’s Chief Accounting and Risk officers are to review and approve the terms of all transactions Enron or an affiliate

enters into with LJM.’’

34

Number 3: ‘‘The Board’s Audit and Compliance Committee shall

annually review all transactions completed that year and make any

recommendations they deem appropriate.’’

Number 4: ‘‘The Board is to determine, also annually, that Andrew Fastow’s controlling position at LJM and his involvement as

a counterparty to Enron does not adversely affect the best interests

of the company.’’

Period. That is the process. This is the head of the legal department of Enron Global Finance laying out what the Board procedures are. That’s what the Board procedures are. Subsequently,

there was an LJM subsequent or supplemental approval sheet that

was come up with, and oftentimes or sometimes they had my name

on that sheet.

Mr. Mintz did not deliver those sheets to me. If Mr. Mintz had

delivered those sheets to me and if I had looked at them and I saw

Mr. Causey’s signature and saw Mr. Buy’s signature and saw the

appropriate signatures within the company, I absolutely would

have signed those and had no problem whatsoever in signing them.

I did not receive those documents.

Senator WYDEN. My time is up for this round, but I want to finish with just one question, because it looks to me when you examine the minutes and all of these associated other documents that

you had a responsibility as the Chief Executive Officer to understand who was specifically designated by the Board to police Mr.

Fastow’s activities. Do you disagree that you were given that responsibility as Chief Executive Officer?

Mr. SKILLING. I can’t be any more clear about this. You say going

through the minutes and going through the documents. Well, let’s

go through the minutes and let’s go through the documents. We did

that. I just told you.

Senator WYDEN. I will tell you, having read from the minutes

specifically, it says Messrs. Buy, Causey, and Skilling are to approve all transactions with the LJM funds.

Mr. SKILLING. Okay, now back up. Back up. That is the October

2000 Board meeting, is it not? This is Mr. Fastow’s representation

of the process that was in place. I believe it’s a Finance Committee

meeting, is it not?

Senator WYDEN. Right.

Mr. SKILLING. And who is making that statement?

Senator WYDEN. I just gave it to you.

Mr. SKILLING. No, who made the statement?

Senator WYDEN. According to the minutes, Mr. Fastow.

Mr. SKILLING. Mr. Fastow represented that that’s what the process was. Mr. Fastow was in error. I’ve got something here from the

General Counsel of Global Finance that lays out in absolute clear,

clear specific terms what that process was. If you go back to the

October 1999, minutes for the Board of Directors where LJM was

approved, you will find that that process is very clearly specified,

and it’s the process I just described to you.

Senator WYDEN. Mr. Skilling, any way you parse this, you had

the responsibility as the CEO to watchdog this area of conflicts and

I see absolutely no evidence that that was done, in spite of this

small barrage of warnings.

We will have another round.

35

Mr. SKILLING. Mr. Senator, may I respond to that? Mr. Senator,

we had two organizational units that were charged with reviewing

these LJM transactions and the conflicts generated. One was our

internal accounting group. We had 600 lawyers in that internal accounting group. Our Risk Control Group under Rick Buy, we probably had 250 people that worked in that organization. They reported directly to the audit committee of the Board of Directors.

Did I feel comfortable that these transactions were being properly vetted by those two huge organizations? Yes, sir, I did. Did I

feel that the process that was in place was an adequate process to

eliminate these conflicts of interest? Yes, sir, I did.

Senator DORGAN. Senator Cleland.

Senator CLELAND. Thank you very much, Mr. Chairman.

Mr. Skilling, I am going to give you what in basketball terms is

just a free throw here, just a free shot.

Mr. SKILLING. Thank you.

Senator WYDEN. I am just trying to understand all of this. Just

literally here, not as an expert in your business—you all are—not

as a business person, but as somebody who does represent hundreds of thousands of people, people in my state, that were hurt by

actions taken at Enron and by the Enron implosion, on behalf of

my school teachers, on behalf of my state employees, on behalf of

Enron employees who went bankrupt because they put their 401(k)

and life savings into Enron stock and are now sacking groceries at

Kroger. On their behalf: In your opinion, what happened to cause

this collapse?

Mr. SKILLING. Boy, I’ll tell you, I appreciate the question, and I’m

surprised that more people haven’t asked the question before. I believe that this was a classic run on the bank. There is a problem

that I believe is what the economists call a systemic problem that’s

in our economy today, that I think you all ought to be addressing.

What the systemic problem is is there is something called MAC

clauses that have started creeping into financing in all levels of organizations in all sorts of different financial transactions.

The derivatives business—you are all familiar with the derivatives business. Worldwide it is probably a couple hundred trillion

dollars of contracts that are outstanding. Most of those contracts

conform to ISDA standards. ISDA is the International Swap Dealers Association. All of those contracts have something called a material adverse change clause in them.

What’s happened is that in the old days, in the 1880s, when

there was a run on the bank, it was the bank that went under.

What happens now is the banks can pull their money out of a company that is threatened, and if somebody walks in claiming an accounting fraud, is tantamount to walking in, in the business world,

is tantamount to walking into a crowded theater and screaming

‘‘Fire.’’ Everybody runs for the exits.

And there are these triggers in all of these financial contracts,

in all of these loans, that mean that even a modest problem that

can be dealt with—these are not big numbers in the grand scheme

of Enron Corporation if we had time.

This is my hypothesis. I wasn’t there. But I think if the company

had some time and had access to some liquidity, I think the company would have been fine. And I think that’s the issue. We have

36

allowed a change in the—when they set up the Federal Reserve

Board, the Federal Reserve Board and deposit insurance was to try

to keep runs on the bank—the reason you don’t want to have a run

on the bank is because if there was a run on the bank, the banks

started pulling money out of the real economy and they stopped

lending or they started taking back their loans.

We have it now automatically built into the contracts, material

adverse change clauses, which means if anything happens to the

borrower the bank can come in and pull their money back. You

know the old story about the bear, the two guys talking about the

bear? The one guy says: ‘‘If a bear comes, just run like hell.’’ The

second guy says: ‘‘You can’t outrun a bear.’’ The other guy says: ‘‘I

don’t have to outrun the bear; I just have to outrun you.’’

You have a situation where the banks get an automatic trigger

and they start sucking liquidity out of a company. It is very, very

difficult to replace that liquidity. If I were in charge of the world,

probably what I would do is I would mandate that federally-insured deposit institutions have to strike those contract structures

from their lending and from their swap agreements.

I think this is—it’s my hypothesis. You may look at it and find

out it’s just totally not true. But it was a run on the bank. It was

a liquidity problem.

Senator CLELAND. But are we not talking a little bit more than

about George Bailey, Jimmy Stewart, and ‘‘It’s a Wonderful Life’’?

I mean, we are talking a little more about that than I think you

admitted to.

Do you see any problem with the whole Andersen relationship

that seems to have been part of the whole systemic problem that

you describe, so that the people that are supposed to be outside the

tent checking the people inside the tent were inside the tent playing the game?

Mr. SKILLING. I, like many other people, relied on the advice that

I got from Arthur Andersen. If there is an issue there—and I know

you all are looking at it—I think that is clearly something that

should be looked at.

Senator CLELAND. Ms. Watkins, you have seen this from the inside. You had guts enough to write a memo. You have described

Enron leadership, the leadership culture there, as arrogant, intimidating, but you had enough courage to fight through that. What is

your understanding of what went wrong at Enron?

Ms. WATKINS. The accounting questions—on October 16 when we

had what was virtually an unexplainable income statement

writedown, as well as a $1.2 billion reduction of shareholders equity, those were related to the Raptor transactions, to LJM2. It was

not a typical writedown, where you’ve paid too much for an asset,

it’s not worth what you paid for it, and you write it down. It was

really effectively unwinding these Raptor transactions.

In my opinion, we could not explain it to the investor community,

because to do so would highlight the fact that we really probably

needed to restate earnings in 2000 and the first part of 2001.

I think Mr. Skilling is correct that what killed the company was

a run on the bank. I don’t know that it was from bankers. I think

it was actually from our trade creditors, the people that we owed

money under gas contracts and power contracts, that closed out the

37

contracts and requested their cash. They were uncertain about our

future. They had a legal right to close those contracts and so they

did.

I stated in my earlier testimony, I think if Mr. Lay had been able

to recognize the gravity of financial statement manipulation and

the loss of trust in the investor community when there’s even a

hint at financial statement manipulation, he would have better

planned for the ensuing crisis that hit the company. We, I believe,

went into that crisis in late October totally unprepared. We did not

shore up any kind of equity or debt financing. There was a run on

the bank. I think we went through billions of cash in a very short

period of time, and once we lost our investment grade rating two

large tranches of debt became immediately due, and that was the

end.

Senator CLELAND. Teddy Roosevelt once said that ‘‘the leader

works in the open and the boss is covert. The leader leads and the

boss drives.’’ One of the problems that I saw initially with the

Enron leadership was, as I said at the first hearing here, that in

combat, officers eat last, but in this mortal combat of economic

competition it seemed that the Enron officers ate first. This whole

culture of intimidation of arrogance, covert operations, the off the

books, this whole sense of not leadership, but bossism, do you think

that got Enron in trouble?

Ms. WATKINS. Yes, I do, because I think it led good people astray

in the fact that they did not question structures that they were not

comfortable with. I think Senator Fitzgerald has mentioned this

Vanity Fair article. I understand there are some quotes in that

about Mr. Skilling’s intimidating practices, and they’re worth reading.

Senator CLELAND. Thank you, Mr. Chairman.

Senator DORGAN. Senator Burns.

Senator BURNS. Thank you, Mr. Chairman. I have just two questions.

Ms. Watkins, can you give me what and when triggered your

concerns that the company was going down the wrong road; what

heightened your concerns that the company could implode if they

stayed on the same path? Could you give me a timeframe in there?

What triggered your curiosity, what happened at what point?

Ms. WATKINS. Okay. When I was pulling together the economic

analysis of our assets held for sale for Mr. Fastow, which began in

mid- to late June and continued through August of 2001, there

were a number of assets, most notably of ET and the New Power

Company, that were hedged with Raptor. The hedged prices were

not what the business units said Enron could achieve, and they explained the structure to me, explained that the structures were

backstopped by Enron stock. Enron’s stock price had declined and

the Raptor entities were basically going bankrupt, and they were

going to be unable to pay Enron the money that Raptor owed

Enron.

Well, it concerned me greatly that you can never use your stock

to affect your income statement. I believe that I—before I went to

Mr. Lay, I actually also went to Rex Rogers, who is an Associate

General Counsel for Enron Corp. under Jim Derek. I told him—I

think this might also be in some of the notes——

38

Senator BURNS. Was that conversation before you had the conversation with Mr. Skilling?

Ms. WATKINS. I did not have a conversation with Mr. Skilling. I

had a conversation with Mr. Lay on the 22nd.

Senator BURNS. Okay.

Ms. WATKINS. But when I talked to Mr. Rogers, I told him that

when I found this in July my first reaction was to start to hunt

for another job. I did not want to work for such an unethical company. My goal was to find a job and get up the courage to go talk

to Mr. Skilling and tell him to stop this; he put this in motion; he

needs to find a way of fixing it.

When he suddenly and shockingly resigned August 14, I felt compelled that I had to warn Mr. Lay that—Mr. Lay had no idea what

was facing the company when this stock would have to be delivered

to Raptor some time in 2002 and 2003.

Senator BURNS. Was that the only conversation you had outside

your office with that counsel?

Ms. WATKINS. I also met with Mr. McMahon for an hour-and-ahalf on August 21. That is when I discovered that Mr. McMahon

had had a conversation with Mr. Skilling and that his concerns

were not addressed. A few weeks later, he got a new job offer and

felt like that was in his best interests to take that offer.

It’s notable that Mr. McMahon’s replacement was Mr. Ben

Glisson, effectively letting the foxes into the henhouse. Mr. Glisson,

as we all now know, was an investor in the LJM partnerships.

Senator BURNS. My question now kind of addresses the concerns

that most of us around here have, in that we all had organizations

in our own states that lost money. And as I made in my statement—the point of my statement—I think we should be looking

here to the outcome of this.

Mr. McMahon, you said that there is a chance that Enron can

survive and regain some position in the corporate world, that it

could survive. What do you point to to base your conclusion?

Mr. MCMAHON. The conclusion that—or the facts that I point

to—to base that conclusion on are several. Well, first off, let me

state, if there is a reorganized entity here, it will look nothing like

its predecessor. For all intents and purposes, the entire merchant

business—energy business—of Enron is gone. It was sold recently

through the bankruptcy court, and what’s left is in wind-down

mode.

So what we are looking to is to find the best way to maximize

recovery for our creditors and other stakeholders. Both Steve Cooper, who is the CEO, and myself believe that it’s a combination of

selling certain assets as well as reorganizing around other assets,

because we think potentially that there’s a more—that there’s a

higher value creation or preservation in that scheme. And what to

reorganize around is still being debated right now internally, but

it’s likely to be our pipelines and power stations that we have.

Senator BURNS. This may be inappropriate, but what are some

of those assets?

Mr. MCMAHON. Well, what’s left with Enron outside of wholesale, or outside the merchant business, are interstate gas pipelines.

There’s a utility in Portland, Oregon. And there’s several utilitytype assets in South America and Europe.

39

Senator BURNS. Has Enron completely separated itself from the

broadband services?

Mr. MCMAHON. It’s certainly in liquidation. We may still have

some assets that are left, but they’re on the market to be liquidated.

Senator BURNS. Thank you, Mr. Chairman.

Senator DORGAN. Senator Boxer.

Senator BOXER. Mr. Skilling, Senator Cleland gave you a chance

to get a softball, and, if I might say, your answer stunned me. This

was your chance to tell us what went wrong in the company, how

you might do something different. And you know what you said?

It’s those MAC clauses—that stands for material adverse

changes—that allowed the banks—federally-insured banks, Mr.

Chairman—to pull out of this company. And you said if you ran the

world, you would change that.

Well, you’re a good, smart student of history, and we saw what

happened during the Depression. That’s when our predecessors decided it was important to federally insure banks. I want to say to

you, if that’s your answer, I hope no one on this Committee takes

your advice, because we’d have banks going broke, and we’d have

this government going broke because we would force them to stick

with a company that was essentially a shell game, which apparently you didn’t get. But your Vice President did. I am absolutely

stunned with that answer.

When you answered Senator McCain—he was asking you a series of questions—you said: ‘‘This is very complex.’’ This is very

complex. One of the things I’ve learned, in years of getting batted

around in politics, is that when somebody tells you, ‘‘This is very

complex,’’ you’ve got to dig behind that. How complex is it to know

what was going on? I want to tell you, if you look at Ms. Watkins’

testimony, she says it in a sentence, ‘‘My understanding as an accountant,’’ she says, ‘‘is that a company could never use its own

stock to generate a gain or avoid a loss on its income statement.’’

Is that true?

Mr. SKILLING. Um.

Senator BOXER. Were you aware of that?

Mr. SKILLING. I am not an accountant.

Senator BOXER. I didn’t ask you that. Is her statement true?

Mr. SKILLING. I think I’d have to be an accountant to know if it’s

true. I don’t——

Senator BOXER. Wait a minute. You have to be an accountant to

know that a company could never use its own stock to generate a

gain or avoid a loss in an income statement. What was your education, Mr. Skilling? I know I read that it was pretty good.

What——

Mr. SKILLING. I have a master’s in business administration.

Senator BOXER. A master’s in business administration. And yet

you didn’t know this simple fact. Is that correct? You’re saying you

were ignorant of that fact that Mr. Watkins has told us.

Mr. SKILLING. Well——

Senator BOXER. It’s not complicated.

Mr. SKILLING. I’ll give you two——

Senator BOXER. Even——

Mr. SKILLING. I’ll give you two——

40

Senator BOXER [continuing]. Those of us up here understand very

clearly.

Mr. SKILLING. Okay, well——

Senator BOXER. The company can never——

Mr. SKILLING. Well, just a second, Senator. Let me give you——

Senator BOXER [continuing]. Its’ own stock to generate a gain or

avoid a loss. And you’re saying—getting your master’s—and where

did you go to school?

Mr. SKILLING. Harvard Business School.

Senator BOXER. Okay. In Harvard Business School, you did not

know this. Is that correct?

Mr. SKILLING. I did not know that there is an absolute prohibition on it, because I—you know, I—again, I am not an accountant,

but I know of at least one case where that’s not true—at least one

case.

Now, I’d also suggest that you go through Mr. Duncan’s notes

that he gave to Vinson & Elkins where he described the accounting

rationale, and I think you’ll find that he has a rationale. And if you

want an example of a case where equity can be used——

Senator BOXER. That’s okay.

Mr. SKILLING. No, Senator——

Senator BOXER. I——

Mr. SKILLING. Senator, may I answer the question?

Senator BOXER. Yes.

Mr. SKILLING. [Inaudible]. Answer, all right? There are cases

where you can use equity to impact your income statement. And

the most egregious, or the one that’s used by every corporation in

the world, is executive stock options. As a matter of fact, I think

FASB [Financial Accounting Standards Board] tried to change that,

and you introduced legislation in 1994 to keep that exemption.

Essentially, what you do is you issue stock options to reduce compensation expense and, therefore, increase your profitability. That’s

one exception. So that is clearly a case where equity can be used

to impact your income statement.

Are there other exceptions? I don’t know. I’m not an accountant.

I would guess there are. If you read Mr. Duncan’s testimony, I

think he—he had a logic—he had a set of logic that was consistent

with his view that this was an entirely appropriate transaction.

Senator BOXER. Yes, I think we understand stock options.

I wanted to ask Ms. Watkins—you said that you didn’t want to

go to Mr. Skilling. Why? What was your issue?

Ms. WATKINS. I did believe it would be a job-terminating move.

Senator BOXER. Say that again.

Ms. WATKINS. I believed that it would be a fruitless effort. And

I believe that now even more than I did in late July and early August.

Senator BOXER. Why do you think that Mr. Skilling would have

fired you?

Ms. WATKINS. I look at his actions, rather than listen to his

words. I mean, I’ve learned on August 21 that Mr. McMahon went

to Mr. Skilling with some very serious concerns. I’ve seen the notes

from the House testimony. He talks about Andy wearing two hats,

that his compensation from LJM could be quite high. His testimony

is that Mr. Skilling said he would fix it.

41

Well, there is no evidence that he ever fixed it. In fact, he put

Mr. Ben Glisson in charge of, sort of, guarding the henhouse, and

that was letting two foxes in the henhouse.

Senator BOXER. So you figured because of what had come before,

that had you gone to Mr. Skilling with this very simple statement

that you made——

Ms. WATKINS. I——

Senator BOXER. By the way, do you stand by that despite

what——

Ms. WATKINS. I do. I believe that Mr. Andy Fastow would not

have put his hands in the Enron candy jar without an explicit or

implicit approval to do so by Mr. Skilling.

Senator BOXER. Okay.

Mr. Skilling, you didn’t have written testimony, but I took some

notes, and your opening statement was extremely compassionate to

the employees. I want to show you a tape—and I believe we have

it ready to go—which was a meeting that took place in 2000. December? Is that the right date?

RECORDED VOICE: I’ll be honest with you guys——

Senator BOXER. 1999.

RECORDED VOICE: [Inaudible]. Employees eligible for the employee referral program, and I don’t know why they can’t be. I don’t

know that that was ever determined. So I would say, yes, they are,

absolutely. [Inaudible.] Should we—listen to this—should we invest

all of our 401(k) in Enron stock? Absolutely. Don’t you guys agree?

Senator BOXER. Okay. So that, at the end of 1999, you agreed,

by laughing and shaking your head, that the employees should, in

fact, invest their money in Enron. I think anyone seeing that would

say that you were nodding in agreement.

Why is it that you had begun unloading your stock pretty heavily

before that date, and yet led the employees to think they should

keep buying stock?

Mr. SKILLING. Ms. Senator, I have been a major shareholder in

Enron Corporation. I am currently a major shareholder in Enron

Corporation. Enron Corporation has constituted virtually 90 percent of my net worth from the entire time that I worked for the

company. I was a strong believer in Enron Corporation. Now, you

can take the videotape to mean what you want it to mean. I was

a supporter of Enron Corporation.

Senator BOXER. Yes, but——

Mr. SKILLING. I believed——

Senator BOXER [continuing]. How much had you unloaded by

that point?

Mr. SKILLING. The term ‘‘unloaded’’ I think is a little bit of a——

Senator BOXER. Well, I’ll say it in a more direct way. How many

shares had you sold up to that point? How much of your own

money had you pulled out of that stock at the time that you shook

your head and said yes to the question, which was, ‘‘Should we

buy—put all of our money—all’’—and you know what happened to

those people. They lost everything. You had a chance to be honest

with them, and you shook your head, yes. How much, in your recollection, had you already sold?

Mr. SKILLING. As I—you know, obviously, I feel terrible about

what happened to the employees. I think if you—if you—if we want

42

to do a dueling videos, also there’s a videotape of an employee

meeting two months later where I go, in pretty excruciating detail,

what some of the issues are that the company is dealing with. I

think I was open to employees, and I think as long as I was——

Senator BOXER. Okay, but you don’t have the answer, so let me

put it in the record. In 1999, the same year that tape was recorded—and you can look at it over and over again—you

agreed——

Mr. SKILLING. I thought you said it was 2000.

Senator BOXER. This was in 1999—the end of 1999. By 2000——

Mr. SKILLING. You’re saying this is December——

Senator BOXER. Yes.

Mr. SKILLING. December 1999?

Senator BOXER. Yes. I’ll just put it in the record because my time

is up.

[The material is not available.]

The insider records show you had sold more than 513,000 shares

of Enron for $22 million at a time when you were nodding in agreement for those people to put everything in their 401(k) into the

company. I just want to get that in the record.

Senator DORGAN. Senator Breaux.

Mr. SKILLING. Excuse me. May I—I would like to see the basis

for that number. You’re saying in the year 1999——

Senator BOXER. Yes.

Mr. SKILLING. I sold 500,000 shares of Enron stock?

Senator BOXER. Yes. We have the records, sir. We’ll send them

over to you during the——

Mr. SKILLING. Right, and then we’ll send you records, too, because I believe that that number’s incorrect.

Senator BOXER. Okay. We’ll show you the records.

Senator DORGAN. Senator Breaux.

Senator MCCAIN. Could I ask——

Senator DORGAN. Senator McCain.

Senator MCCAIN. Isn’t it true that in the year 2000, you received

$5.6 million as a bonus; and in 1999, $3 million as a bonus; in

1998, $2.25 million as a bonus?

Mr. SKILLING. I don’t recall.

Senator MCCAIN. You don’t recall what you received as a bonus?

$5.6 million?

Mr. SKILLING. I don’t recall. I’m sorry.

Senator MCCAIN. Thank you, Mr. Chairman.

Senator DORGAN. Senator Breaux.

Senator BREAUX. Boy, I would have remembered mine.

[Laughter.]

Senator BREAUX. Thank all of you for being with us.

Mr. Skilling, you said in your testimony that you are somewhat

of a business history buff. Can you think of a bigger mess in business than we have here with the Enron situation in recent history?

Mr. SKILLING. In recent history? Or do you want me to go back

in time? I think there have been a lot of times when there have

been panics that have led to cascading problems in the economy,

and I think you see some of the signs of that starting to happen

here, as well.

43

Senator BREAUX. But I mean by any measurement. This one of

the biggest and largest business failures in terms of the size of the

company and the number of people that have been affected, that

I can certainly remember. I’m not a business history buff, but it

seems to me that——

Mr. SKILLING. I just don’t know, Senator.

Senator BREAUX. Well, I think it’s the biggest mess we’ve had in

business failures in a long time because of the extent of the failures

and the number of people and the number of states that have been

affected by it and the fact that it’s the subject of every talk show

in this country today. I mean, we’ve got a mess on our hands, and

how we handle it, I think, is incredibly important.

I’d like to ask you—I mean, Monday morning quarterbacking is

generally not a good thing to participate in, but in this case I think

that perhaps it could be helpful. You made a number of statements,

Mr. Skilling, about, ‘‘I don’t remember. I relied on advice of attorneys. I relied on the advice of Arthur Andersen,’’ et cetera, et

cetera, while you were President, Chief Operating Officer and CEO

of Enron. Looking back at all of this, can you tell the Committee

what you would have done differently during your period in those

various positions?

Mr. SKILLING. Well, it—you know, I’ve said before—I’ve gone

back and tried to think what I would do differently, given the facts

I had at the time. And I—you know, quite frankly, I—there’s nothing I can come up with and—that I would think I’d do different,

given the facts I had at the time. That—obviously, there have been

a whole lot more facts subsequent to——

Senator BREAUX. Well, can’t you look back and say, ‘‘Look, I

would have instituted a system to make sure that—as the Chief

Operating Officer—that I was given the facts’’? You know, it’s one

thing to say that, ‘‘I didn’t get the information that I should have.’’

Mr. SKILLING. Yes.

Senator BREAUX. But as Chief Operating Officer, isn’t it your responsibility—or CEO or President—to set up a mechanism to ensure that, in fact, you did get the information? It’s not enough, I

think, to say, ‘‘They didn’t tell me.’’ Why didn’t you have a system

that assured you, as Chief Operating Officer, that you were informed?

Mr. SKILLING. I believed we had a good control system in place.

In fact, I think if you compare the number of people involved in our

control system, the reporting structure for that control system, I

think you’ll find that it is far more invasive than any other company that I’m aware of. The company spent a lot of time on controls. It turned out that something went wrong.

And in retrospect, what I wish—you know, in retrospect, I wish

I’d never heard of LJM. And—but at the time, with the facts we

had, the information we had, it looked like something that was in

the interests of our shareholders.

Senator BREAUX. You mentioned that Enron’s failure was due to

a classic run on the bank type of situation that had developed. It

seems to me if that’s true, that you were one of the major contributors to the run on the bank by your abrupt resignation, and the

selling of $66 million worth of stock during a period when you were

running the company and claiming the stock was undervalued. As

44

the Chief Operating Officer, you were selling huge amounts of

stock while you were telling the general public and Enron employees that the stock is really undervalued.

Were you not contributing to the so-called run on the bank at

Enron by your actions in selling your own stock and abruptly resigning?

Mr. SKILLING. We’ve talked about the reasons for my abruptly resigning. I resigned—I don’t know that most people would characterize it as abrupt, but I resigned for reasons unrelated to Enron

Corporation.

And so, in retrospect, you know, I’ve made clear that when this

thing broke out, when we started to see the drain of liquidity in

the company that occurred after, I believe it was, October 23, I

called Mr. Lay and offered to come back to the company at no compensation to do what I could, if I could do anything, to help remedy

the situation.

Senator BREAUX. Ms. Watkins, thank you for being with us. You

mentioned in the memorandum, the seven-page memorandum that

you had sent out, that you were incredibly nervous ‘‘that we will

implode in a wave of accounting scandals.’’ I guess what I’m trying

to figure out, did you think that the accounting structures that the

company had entered into in all the offshore investments, the special purpose entities—if you read where they were located, it

sounded like you were reading the United Nations’ roll call or

something. They were all over the world. Were you saying, when

you suggested accounting scandals, that the structures themselves

were illegal they way they were set up? What were you saying

when you were talking about accounting scandals? I think that Mr.

Skilling would say that Arthur Andersen said all these things were

appropriate and proper and legal. So, what were you talking about

when you talked about accounting scandals?

Ms. WATKINS. My concern was with the Raptor special purpose

entities. Enron did use a number of offshore special purpose entities in structuring its international assets. I think those are fairly

legitimate. Quite often it was to give us all kinds of alternatives—

if we ever decided to sell the asset, that we had a subsidiary that

might appeal to a European buyer or a U.S. buyer or an Asian

buyer. My concern was with the Raptor special purpose entities.

And the problem that—when any company has doubts about

whether or not it has manipulated its financial statements, it goes

through a severe crisis. Waste Management had such a similar

problem. But with Waste Management, if they’re rolling down your

street and picking up your garbage, you don’t mind that they might

be in financial trouble. You still pay them the monthly fee.

Our problem was that 90 percent of Enron’s business was primarily trading, and that business could dry up in a heartbeat if our

trade counterparties were not completely certain of our financial

health. The problem is that a customer doesn’t know whether

they’re going to owe us money or we’re going to owe them money.

It all depends on future gas and electricity prices. So that’s why I

felt we were particularly vulnerable to a financial accounting scandal.

Senator BREAUX. Did you think that the structures, in particular,

the Raptor structures, were improperly set up, or were you conVerDate 03-FEB-2003 08:49 Sep 29, 2005 Jkt 088896 PO 00000 Frm 00048 Fmt 6601 Sfmt 6601 D:\DOCS\88896.TXT SSC1 PsN: SSC1
45

cerned just about the risk it had put Enron at by participating in

them?

Ms. WATKINS. My opinion was that it was—it could not be appropriate. I did vet my concerns with Mr. James Hecker, a former

mentor of mine at Arthur Andersen. I spoke to him for approximately 48 minutes on August 20. I hadn’t been in accounting for

about ten years, so I wanted to make sure that the accounting

rules hadn’t changed materially since I was last in accounting. And

his words to me were, ‘‘Any accounting treatment must be clearly

defensible if fully exposed.’’ And I felt like these Raptor transactions, if fully exposed—if fully explained to an investor, they

would be horrified.

Senator BREAUX. And that’s what you conveyed to Mr. Lay?

Ms. WATKINS. Yes, and I also participated in a three-hour interview with Vinson & Elkins on September 10. Their interview notes

from that were part of the documents released by the House. I’ve

reviewed those notes. And in my opinion, Vinson & Elkins understood my concern about the crisis facing the company.

Senator BREAUX. My final point is that it seems to me before all

of this you had some of the finest and wisest advisors in the world

working at Enron. Arthur Andersen’s reputation prior to this certainly was excellent. The law firm of Vinson & Elkins has the same

type of reputation. I just can’t figure out how, with those advisors,

not telling folks at Enron that, ‘‘Hey, you can’t do this’’ seemed appropriate. You’re paying them a lot of money to give you the best

advice possible, and either they were not giving you the best advice, they were totally wrong, or they were so much part of Enron’s

culture that they were part of the problem, too. I’m not sure which

it is.

Thank you.

Senator DORGAN. Senator Carnahan.

Senator CARNAHAN. Thank you, Mr. Chairman.

Mr. Skilling, Ms. Watkins just testified that you always look to

the market for guidance. If so, why didn’t the fact that the value

of Enron stock had dropped by 50 percent not strike you as a problem? And how could you think that Enron, under those circumstances, was perfectly healthy when you left the company?

Mr. SKILLING. Well, Senator, I was, you know, clearly aware of

the drop in the stock price, but there are things other than a drop

in the stock price to make difference. I mean, the reason the stock

price dropped—there were basically three reasons.

The first one was that the collapse in optical fiber stock started

in March—February and March of the year 2001. We were viewed

as a player in that optical fiber business, and that immediately hit

our stock. The second thing was the litigation and temperature related to the India power facility, as I’m sure you’ve all heard, was

growing in ferocity, and there was a great deal of controversy and

noise about that, which also hurt the stock. And then the last

thing, which I think probably was also important, because of the

California power problems, there was a fear that the wholesale

markets might put in price caps and re-regulate the natural gas industry, and I think that was viewed as negative for Enron in the

long term.

46

Now, all of those things being said, on the inside, having looked

at it, we made some tremendous progress in that time period. First

of all, the broadband business, we had staunched the flow. You

know, by the time I left, in August, we had significantly reduced

the capital budget. We had redeployed a lot of people out of the

business. So we had reduced the burn rate, and we felt we could

wait it out—you know, that we could wait out this problem in the

broadband business.

The India problem—the Prime Minister from India was visiting

the United States in September, and there was some thought that

he might offer a resolution of that problem that would be acceptable to Enron.

The third thing was that our wholesale business, which is really

the core of our business, had had the best quarter in history. I

mean, the wholesale business was doing extremely well and, from

an earnings standpoint, just was extremely profitable.

So the outside world, I think, was seeing broadband, was seeing

India and potential regulatory issues. What we were seeing inside

is that we had solidified a lot of our businesses, and our core businesses were extremely strong.

Senator CARNAHAN. But how could you say that the company

was in good financial condition when you left, under those circumstances?

Mr. SKILLING. I felt that having made the changes that we made

in the broadband business, the strength of the wholesale business,

the fact that we were potentially going to be resolving the India situation—all of those things made me feel that the company was in

good shape. And I believed, when I left on August 14, that the financial statements of the company were an accurate representation

of my understanding of what the financial condition of the company

was.

Senator CARNAHAN. When you left, you never really gave a credible explanation—when you left in August. You claimed that you

believe that the company was in sound financial condition at the

time and that you simply left for personal reasons. Frankly, I don’t

find that a convincing argument. You had spent a decade working

your way up through the company to this pinnacle of power. And

yet, on August 14, just six months after you became CEO, you

abruptly resigned. It looks suspiciously as if you realized that the

company was coming apart, and you jumped ship.

Can you offer this Committee some explanation of what changed

in your personal life in August that made you so determined to

leave this dream job? Why did you not resign in June? Why did you

not wait until October? Why was this the date selected?

Mr. SKILLING. I had personal reasons. You may not find them

credible, but they are the reason that I left Enron Corporation.

Now, you say it was the perfect job. To be quite frank, I was

tired. I was flat-out tired. This may be a perfect job for some people. It was not the perfect job for me. And there were a lot of people in the company that knew that I was tired and that this was

not something that was particularly important.

I had issues in my family that were more important for me. I

mean, I had spent, as you said, the last ten years of my life—I

think most people at this table will tell you that my car was there

47

first thing in the morning, and my car was the last car to leave

at night—I had spent ten years working very, very hard to build

this company, and I had missed a lot. I had a clear imbalance in

my priorities in life, and I had neglected some things that needed

to be dealt with at that time.

That is the reason I left the company. I did not leave the company because I thought the company was in imminent financial

danger.

Senator CARNAHAN. I have one other question. Mr. Skilling, I’m

perplexed by your purported recollection of the meeting that you

had with Mr. McMahon in March of 2000. Mr. McMahon claims to

have told you that he could not continue to work with Mr. Fastow

without compromising his integrity. You said that you believed that

this was a conversation about compensation. If an employee comes

to you and says that his compensation would be higher if he compromised his integrity, doesn’t this set off some alarm bells for you?

Why did you take no action to rectify the fundamental conflict that

was raised by Mr. McMahon?

Mr. SKILLING. There is no time—no time when I’ve been at

Enron Corporation when I have asked anyone to compromise their

integrity. It just doesn’t happen.

My interpretation—and again, this is just, you know, two people

remembering a meeting—a half-an-hour meeting two years ago—

my recollection is that Jeff said that he was concerned about the

conflicts that were in place as it related to his personal situation,

and he asked me for my support for him, and that, if I did that,

he was comfortable doing what he needed to do to maintain his integrity. And that’s my interpretation of it, Senator. It was a long

time ago.

Senator CARNAHAN. Well, according to Mr. McMahon’s notes,

he—as his talking points to you, he says, ‘‘I find myself negotiating

with Andy on Enron matters and am pressured to do deals that I

do not believe are in the best interests of the shareholders.’’

Mr. SKILLING. Yes, and I’ve seen this note, and I think there are

two pieces on this page. The first piece is, Jeff relates to an untenable situation. And I am sympathetic to the untenable situation.

And he says, ‘‘Here are the requests or options.’’ And there were

two options that Jeff presented in this paper.

And again, I don’t specifically recall this discussion. I just recall

my impression or interpretation of what occurred in the discussion.

But request for option number one was, ‘‘In order to continue to do

this, I must know I have support from you and there won’t be

ramifications—believe it already has affected my compensation—or

need to let me out of the situation and move to a different job.’’ I

personally—there is no question, given those two alternatives, that

I would have suggested to Jeff that I would support him in any

way possible for him to carry out any belief—any ethical duties or

beliefs that he had as an individual.

I mean, that just—I don’t think—I don’t think my description of

that session or that meeting is at all in conflict with Mr. McMahon.

I think we both came out of it—I felt that we had discussed it, and

I felt that we had resolved the issue, and I had called people to

help resolve the issue. And Mr. McMahon did not come back to me

48

subsequent to that. Mr. Glisson did not come to me and say that

they were having a problem.

As Ms. Watkins points out, Mr. Glisson, as it turns out, had an

equity interest in one of the structures. I was not aware of that—

I mean, absolutely not aware of that. So I would have expected, if

Mr. Glisson had any concerns about any operation of the Global Finance group that he would have come to me, as well, and we would

have sorted it out.

Senator DORGAN. The time of the Senator is expired.

Senator CARNAHAN. Thank you. I just fear that you reduced a

conversation about character to a conversation about money, and

that was my concern. I’m concerned that the bankruptcy of this

company does not compare with the bankruptcy of character that

occurred in the executive suite.

Senator DORGAN. I thank the Senator.

The Senator from Virginia.

Senator ALLEN. Thank you, Mr. Chairman. I’d like to follow up

on Senator Burns’ and Senator Breaux’s very logical, commonsense

statements and questions of you all so that we can maybe draw

some conclusions here on what ought to be done in the future to

prevent this. I’m not sure you can prevent bad business judgments,

but at least let people understand and know what sort of investment they’re making and assess for themselves the risks of various

corporations in which they may wish to invest.

Now, Ms. Watkins, I’m not going to ask you for a legal conclusion, but do you believe that Enron engaged in accounting practices

which, in effect, whether by design or otherwise, hid expensive or

underperforming investments from investors by keeping these liabilities off the books?

Ms. WATKINS. My concerns were primarily with what I saw as

income statement manipulation. I believe, in the memos that I

gave Mr. Lay, I was concerned that Avici within Enron Broadband

and the New Power Company, was hedged. That was an Enron Energy Services investment. By hiding the losses that those business

units were achieving—or having occurred in those stocks, it made

those two business units look more profitable for a longer period

of time. It let us enjoy a very large multiple, because those were

our growth businesses, for a longer period of time. And I believe

investors were hurt by those income statement manipulations.

Senator ALLEN. Now, Mr. McMahon, per Ms. Watkins’ memo, did

you have any concerns regarding Enron’s accounting practices and

the use of these special purpose entities to move assets off Enron’s

balance sheet and, thereby, hide the debt obligation or the profitability of the company from investors? Did you have concerns about

that?

Mr. MCMAHON. When Ms. Watkins showed me her memo, actually the items in there I was unfamiliar with, but the allegations

that she made in that memo were concerning to me, and I encouraged her, as others did, to see Mr. Lay about it.

Senator ALLEN. At any point in this whole matter could anyone

have stopped this from becoming a full-blown catastrophe?

Mr. MCMAHON. That’s a difficult question. I think it goes back

toward really what caused it and how could it have been prevented.

And I became CFO of the company on October 24, when Mr.

49

Fastow left the company, so my perspective is somewhat limited

here, but I would probably echo both Mr. Skilling and Ms. Watkins’

testimony in that I think there was a big liquidity draw. I’m not

sure what the cause was. I think there’s still a lot of facts that are

yet to come out about what happened at Enron and what the cause

was.

But as—from my perspective, as a finance person, I saw a balance sheet—or a financial condition that was fairly weak and

couldn’t withstand much stress, and it was getting an awful lot of

stress in the market at that point in time.

Senator ALLEN. Mr. Skilling, in your testimony, you said you relied on the advice of attorneys and accountants who told you that

these special purpose entities and activities were appropriate. In

other words, they were technically legal.

But again, let’s get to the lessons learned. Mr. Skilling, do you

actually think that during all of this, the true financial condition

of Enron was being accurately reported?

Mr. SKILLING. First of all, I think you’ve made a suggestion or

an insinuation that there might have been something illegal.

Senator ALLEN. I’m not saying it was illegal. Let’s assume that

everything, as far as accounting practices, auditing, and counsel

was technically legal. Assuming that’s so, were investors who were

thinking to invest and maybe did invest in Enron stock getting a

true picture of the financial condition of Enron?

Mr. SKILLING. I believe the financial statements were an accurate representation of my understanding of the financial condition

of the company.

I’d like to address—as you brought it up, I’d like address one of

those issues. There’s been a lot in the press, and I think your question suggests, that there’s some issue of hiding debt, that—the use

of off-balance sheet or special purpose entities had its intent in hiding debt. And all I can do is—I can refer you to page 78 of the year

2000 10-K. There’s a section that’s called ‘‘unconsolidated equity affiliates.’’ Unconsolidated equity affiliates would be partnerships

and special purpose entities that were not consolidated into Enron’s

balance sheet.

There’s a two-page description of the earnings that were appropriate—or associated with those vehicles. And on the second

page——

Senator ALLEN. Alright, let me interrupt.

Mr. SKILLING [continuing]. It shows the full balance sheet——

Senator ALLEN. What——

Mr. SKILLING. Senator, please.

Senator ALLEN. I just want—I want you to——

Mr. SKILLING. This chart shows exactly—exactly what the total

amount of the outstanding liabilities were that were non-consolidated liabilities. So the whole issue of hiding debt, it’s not an—it

was in the 10-K. Anyone reading the 10-K would have a hard time

missing this page.

Senator ALLEN. Okay. Thank you, Mr. Skilling. A lot of people

must have missed it.

Now, to all three of you all——

[Laughter.]

50

Senator ALLEN [continuing]. What changes in law would any of

you suggest—whether it’s SEC regulations or rules, whether it’s accounting or auditing standards—that would give investors better

information?

Mr. SKILLING. Again, I think to the extent that we in management and shareholders relied on our professional accountants, to

the extent that we were not getting accurate information from the

accountants, for whatever reason, I think that certainly is worthy

of investigation by this group.

I also believe that this group should look into this issue of liquidity and how that happened, because there was a serious, severe liquidity drain. And I think a lot of it was imbedded in these derivative contracts in the standard—is the forms that I think just—I

don’t think that’s a real good idea.

I think we’ve got a systemic problem that’s come in the last 10

or 15 years in this country, and we’re now starting to see it spread.

I mean, now they’re going after IBM. They’re going after GE.

They’re going after Computer Associates. They’re going after

Qwest. And it’s okay to go after them and challenge their accounting. That’s okay. But if, by doing that, you set off a chain reaction,

a nuclear reaction, that drains liquidities from these companies, ultimately a lot of people are going to get hurt.

And maybe we can look at Enron as the canary in the mine

field—or the coal mine. You know, they used to bring a canary

down to see if there was—yeah. Maybe that’s the issue, you know,

and something that people ought to be looking at. I personally—

I’m concerned about it.

Senator ALLEN. Ms. Watkins.

Ms. WATKINS. My personal opinion, as an investor in the U.S.

stock market, is that the accounting firms and their clients have

grown too cozy. And I understand there are proposals to limit the

amount of auditing and consulting work. But my personal opinion

is that I would feel better if public companies were required to rotate their accounting firms for periods as short as every three

years.

Mr. MCMAHON. I like—I think—if there is an issue, I think

that’s something that certainly ought to be—three years might be

a little bit tight, but——

Senator ALLEN. What about information, as far as these off balance sheet transactions?

Ms. WATKINS. I think that certain of the special purpose entities

that are off balance sheet that have any kind of call back to the

company that is of any significance—for instance, right now I think

it is a very legitimate structure to pledge your stock as a backstop.

You push assets off. You’ve got debt that should be non-recourse

just to those assets in a special purpose entity. But it is currently

acceptable to also put a call back into the company’s stock and still

have that be off balance sheet, and I think that rule needs to be

looked at.

Senator ALLEN. Mr. McMahon, do you have any suggestions of

improvements to inform prospective investors?

Mr. MCMAHON. Again, not speaking of any particular company,

Enron or not, I believe financial statements are very difficult to

read right now. I think it stems from management’s discussion and

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analysis, recurring and nonrecurring earnings, off balance sheet

items scattered about the footnotes, guarantees, other places. If I

were to recommend anything to this Committee, I would suggest

some form of mechanism to improve and actually expedite the investor’s ability to read and understand financial statements.

Senator ALLEN. Thank you, Mr. Chairman.

Senator DORGAN. Thank you.

Senator Nelson.

Senator NELSON. Thank you, Mr. Chairman. I want to take the

discussion, Mr. Chairman, in a different direction.

There were some 33 public pension funds that had a considerable

loss as a result of the fall of Enron’s stock, but one in particular

that is my state, suffered the loss when the stock was dropping. I’d

like to go back to the statement that both of you, Mr. Skilling and

Ms. Watkins, testified to, that you thought that the problem was

a run on the bank, the fact that the stock was dropping because

banks were calling the loans, and you pointed out this material adverse change, or MAC.

So, on the basis of what you said, then it would seem—and also,

I think you said something to the effect, Mr. Skilling, that if the

company had had time, it would be okay. So the idea would be, as

the stock was dropping, there would have been clearly an incentive

from the corporate executives or Board members to want to get the

stock price back up so the banks would not call in their loans.

So, as we’re trying to get into this Florida situation, what I’d like

to know from any of you, do you have any knowledge of any communication from the company, from its executives, from Board

members, to any institutional investors, including Florida and the

Florida Retirement System that said, in effect, ‘‘Help us. The company is going to be okay. Buy the stock now so it will get the price

back up.’’

Let’s start with you, Ms. Watkins. Do you have any information?

Ms. WATKINS. My concern was with how we fell so fast into

bankruptcy has less to do with the stock price and more to do with

our trade counterparty payables. We had approximately $16 billion

of receivables on our balance sheet as well as $15 billion of

payables. The problem that you have with uncertainty about our

future financial health was that, on the liability side, those customers closed out their contracts—a number of them did—and demanded payment, and several billion dollars went out of the company in a very short period of time.

The only way to combat that is to quantify to the investing public

what our problem is. What I wanted to see happen is that we

would restate, come clean, explain our problems, accrue a large liability on the balance sheet for shareholder litigation—quantify the

size of our problem for the market so that it would become comfortable that we had a life ahead of us and that they would, you

know, cease to close out—or seek to close out the commodity trade

payables with us.

Senator NELSON. Thank you for your opinion. Did you have any

information of any knowledge, any information, any communication

being shared from Enron, its officers, its principals, its Board members to institutional investors to buy?

Ms. WATKINS. No. No, I don’t think so.

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Senator NELSON. Mr. Skilling.

Mr. SKILLING. Senator, I left the company on August 14, so I

wouldn’t know what happened.

Senator NELSON. Yes, I understand.

Mr. McMahon.

Mr. MCMAHON. I have no knowledge of that kind of communication either.

Senator NELSON. Did you know a fellow named Frank Savage,

Mr. Skilling?

Mr. SKILLING. Yes, sir. Mr. Savage is a Board member. I don’t

know if he’s—I guess he’s not a Board member now, but he was

a Board member of Enron Corporation.

Senator NELSON. Were you aware that, back in August—up until

about August, that he was a principal and officer in one of these

outside money-management firms?

Mr. SKILLING. I can’t tell you which one, but, yes, I believe he

was in the money-management business.

Senator NELSON. Tell me about some of these partnerships. At

one point, you all were not only going to finance energy, but you

were looking into other commodities, including water. What was

that all about?

Mr. SKILLING. Well, there were basically two businesses in

Enron—three businesses in Enron. There were, kind of, the regulated businesses. There was our international development business. And there was our merchant business, our wholesale business. The rates of return on assets in the international business

were not compensatory, and so we were trying to reduce the size

of that business.

There was a team of people on the international side that believed that there was an opportunity to do much the same thing,

but more profitably, in the water business. And so it was discussed

with the Board that this would be an alternative, and we went into

that—we decided to try that business.

Senator NELSON. And was there a fellow named Kinder that

headed up that subsidiary for Enron?

Mr. SKILLING. No. Rich Kinder was President before I was President of Enron Corporation. The person that headed up the water

business was Rebecca Mark.

Senator NELSON. And what was that water business, as it originally related to Florida and the Everglades restoration?

Mr. SKILLING. Oh, I don’t know, sir. I was—actually, I was on the

Board of the Zurichs, and I can vaguely recollect that they would

share with us a number of different projects that they were interested in and that they were pursuing, and I—you know, I vaguely

remember something in Florida, but I don’t know the specifics.

Senator NELSON. So going back to my original question, I’ll conclude with this, Mr. Chairman. With regard to any communication,

whether you were at the company or not, your testimony is that

you know of no communication from the company, under the conditions in which the stock was dropping in October, to purchase the

stock by outside investors—in particular, institutional investors. Is

that the testimony of each of the three of you?

Mr. SKILLING. Yes.

Ms. WATKINS. Yes.

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Mr. MCMAHON. Yes.

Senator NELSON. Thank you, Mr. Chairman.

Senator DORGAN. Senator Hutchison.

STATEMENT OF HON. KAY BAILEY HUTCHISON,

U.S. SENATOR FROM TEXAS

Senator HUTCHISON. Thank you, Mr. Chairman. I apologize for

being so late. I was the author of a bill called Transitions to Teachers and had an event with the First Lady this morning to announce

a program in the District of Columbia. So I’m very sorry.

But I am advised by my staff that several of the questions that

I had have been asked already, so I’m going to try not to duplicate

questions. I would like to focus somewhat on where we are now

and on the future, Mr. McMahon, since you are in charge now.

I have met with the Enron employees, and I’ve heard their concerns. Certainly I’ve listened to much of the testimony from other

hearings, but this is my line of questioning today. And it is, what

is the company doing now with regard to the employees who were

not able to get even their severance pay?

Obviously, you have given retention bonuses to people to keep

them, and that’s not an illegitimate thing to do to try to keep the

company going. But thousands of people were not even able to get

the severance pay to which they were entitled under the company

rules. They have no standing in court, I’m told, because they are

the very last in line as an unsecured creditor.

Is the company going to try to give the severance pay that is

owed to the former employees? Is that even on your radar screen?

Mr. MCMAHON. Well, there’s no question. I think what’s happened to, obviously, the former employees is a tragedy, and we are

very concerned about that. The ability for the company to pay any

amounts under severance is a matter of law. It’s in the bankruptcy

court, so it’s not necessarily within our control.

We are looking at, from a legal perspective, what options we

have and what ability we have to make some type of severance

payments to the employees. That work is ongoing currently as we

speak. That would ultimately have to be discussed with the Creditors Committee, as well, and then that would have to be approved

by the court.

So it’s a process that’s not completely in the company’s control.

And as I understand it, as we’ve advised from the legal counsel, the

severance plan that Enron had terminated upon the bankruptcy.

And that’s what has prevented us from making payments to the

employees, as I understand it. And so we are exploring all the options we have, now that we’re under the bankruptcy rules, to try

and do something for these employees.

Now, above and beyond severance, we are holding some programs in Houston for job fairs and what-not, so we’re doing everything we can as an institution, short of making these payments,

which, at this point, we’re prohibited from making.

Senator HUTCHISON. But you are looking at a possibility of trying

to keep that commitment, if you can get the other creditors to work

with you in the bankruptcy court?

Mr. MCMAHON. Yeah——

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Senator HUTCHISON [continuing]. To those who were terminated

by the bankruptcy?

Mr. MCMAHON. Correct. The way I would characterize it is, we’re

exploring all the options that we have as a company, under the

bankruptcy laws, to be able to make severance payments. And once

we finish that legal work, the analysis, we’ll bring it to the Creditors Committee with a recommendation. But unfortunately——

Senator HUTCHISON. Are you going to make an effort to try to

put them in a first-in-line situation rather than a last-in-line situation?

Mr. MCMAHON. Well, again, unfortunately that’s a bankruptcy

law question which I can’t control. What we are trying to do is

to——

Senator HUTCHISON. But are you going to try to do that? Is that

what you want to do if it can be done legally?

Mr. MCMAHON. Absolutely. We want to do everything we can do

for the former employees who were severed as part of this process.

And unfortunately, we’re in the box of working through the bankruptcy process, and we’re going to have to do that.

Senator HUTCHISON. Well, let me ask you this. How many employees were let go before the filing of bankruptcy?

Mr. MCMAHON. I’m not sure if I understand your question. The

vast majority of the employees were let go a day or two after the

bankruptcy.

Senator HUTCHISON. Is there anyone else on the panel who could

tell me if there were a number of employees who were severed before the bankruptcy, that might have a better case for the company

to meet their commitment? Does anyone else on the panel know?

Ms. WATKINS. I’m not really aware, but I think, as Mr. McMahon

points out, that there were—and Mr. Skilling, as well—there was

some downsizing going on in the broadband group. Those people,

if they still have outstanding severance payments, I guess, would

have a claim in the bankruptcy estate for those payments.

Senator HUTCHISON. But the company would have the ability to

meet its commitment if they were severed before the bankruptcy?

Or did bankruptcy eliminate all of your options?

Mr. MCMAHON. Unfortunately for those employees, the obligation—they were—anyone severed prior to the bankruptcy—again,

as I understand it; I’m not an attorney—but they have—since the

severance plan was active when they were terminated, they are

due their severance. The bankruptcy, though, puts them as a general unsecured creditor, and all those obligations right now are

stayed as part of the bankruptcy, as any other obligation for Enron

is.

Senator HUTCHISON. Let me ask you, I’m not sure if anyone

asked this before, but I have introduced a pension reform bill that

includes more transparency and more information to employees,

but does not discourage companies from offering 401(k)s, because

I think 401(k)s are a great vehicle for retirement security for millions of Americans. But my bill also addresses the issue of auditing

and consulting.

And I was general counsel of a bank holding company, and it was

just a policy that we didn’t have the auditors also giving us consulting advice. And I just wanted to ask you—also you, Mr.

55

Skilling—if you think that we ought to pass a law that would prohibit that mix as a conflict or potential conflict.

Mr. MCMAHON. I think the relationship between audit clients,

from an independent audit perspective, as well as separate accounting consultation, is something that I think that the Senate

should look at, frankly. It would appear to be a conflict from the

outset. And how that conflict is managed between the firms is

probably something that should be reviewed.

At Enron, going forward, we are looking to institute some best

practices in a variety of places. And this is one where we’re looking.

Obviously, we’re in need of new auditors. We’ve replaced our accounting personnel internally, as well. And we want to go forward

with something that’s best practices. So we’re, as an institution,

looking forward to that, as well.

Senator HUTCHISON. Are you, in your company, doing what several other companies are doing voluntarily, are you going to make

a policy not to have the same firm do your auditing function and

your consulting?

Mr. MCMAHON. We’re unfortunately not that far in the thought

process, because we don’t have auditors yet. And actually, the person who we just put in charge of our accounting has only been

doing it for a week or so. But, the thought process we want to go

through is, what type of areas, going forward as a new company,

as a reorganized company, can we have best practices?

Senator HUTCHISON. Do you have an opinion, as the CEO of the

company? Are you going to make a recommendation to the Board

on that subject?

Mr. MCMAHON. My personal opinion, at this point in time—and

this is subject to, I think, a lot of internal discussion as well as external. Ms. Watkins testified earlier that auditor rotations is something that she recommends, and I tend to fall in that camp as well.

Every X amount of years it probably makes sense to bring in a new

set of eyes and look through the books.

One area that I think Enron historically could have done better

is—as I understand, we outsource most of the internal audit function to our external auditors. And I think on a go-forward basis,

that’s not something I would recommend either. As far as consulting, if you change over your auditors every couple of years,

maybe that’s not as big of an issue. So that’s the kind of discussion

we’re going to have internally.

Senator HUTCHISON. I know my time is up. Could I just ask Mr.

Skilling and Ms. Watkins or anyone else to address that last question?

Ms. WATKINS. What I’ve said previously is that I would like to

see public companies rotate their accounting firms for periods as

short as once every three years. I think the largest deterrent to

problems such as what Enron has faced is another pair of eyes—

a second, you know, look. You are likely to be more conservative

and less aggressive in the accounting treatments you adopt when

you know another accounting firm is going to be taking over your

client and your work in less than three years.

Senator HUTCHISON. You think rotating alleviates the need for

the division between the firms doing the consulting and the auditing?

56

Ms. WATKINS. Yes, I do.

Senator HUTCHISON. Mr. Skilling.

Mr. SKILLING. I agree with Ms. Watkins. I think there are a lot

of efficiencies—or at least I think the accounting firms—Jeff and

Sherron both work for accounting firms, so I’m not as familiar with

them, but the argument they’ve made is that if you can do consulting and the auditing, it’s much more efficient, because the people know what’s going on. And so I don’t know that that’s a huge

problem, but I would agree with Ms. Watkins that now, in retrospect, I think it would be a good idea.

I think three years may be too short, because in something like

Enron, it was a huge company, and you’d have to have hundreds

of people going out and hundreds of people coming, and I don’t

know quite how you’d manage that every three years. But some

sort of rotation is probably a good idea.

Senator HUTCHISON. Thank you, Mr. Chairman.

Senator DORGAN. Senator Snowe.

Senator SNOWE. Thank you, Mr. Chairman. I’m sorry that I was

unable to be here for the entire questioning, but I’ve got dual responsibilities.

Mr. Skilling, I’m interested to know what was the role of CEO

at Enron, I heard you say that you’re not an accountant, but that

you relied on accountants for their advice and pretty much presumed that they were correct. There was no skepticism and there

was no questioning. You were at Board meetings obviously, as the

CEO, you were present at the Board meetings that had been referred to—for example, the one in February 2001. Is that correct?

Mr. SKILLING. February 2001?

Senator SNOWE. Yes.

Mr. HILER. Senator, can I just—for purposes of clarification,

please, I think you indicated something about that he may have indicated that accounting practices were not questioned, or there was

no skepticism, or as to whatever the auditor said, and I don’t believe he testified to that. I just wanted to make the record clear,

because there are a lot of questions, as there were in the House,

where there are double premises to the questions or characterizations with which we don’t agree, and then my client is asked to answer a question yes or no, and it unfortunately could appear that

he’s agreeing with the characterization.

Senator SNOWE. Well, we’re just asking questions about these

particular partnerships and accounting practices, whether it’s LJM

or Chewco or Raptors or whatever. So would it be correct to say

that there was any questions about them, or not?

Mr. SKILLING. It would be my assumption—we had an accounting

organization of hundreds of people. I would assume there are all

sorts of questions that were asked of the auditors about all accounting issues inside of the company.

Senator SNOWE. I guess what I’m trying to understand—because

I’m having difficulty understanding how this all worked, is what

was the role of your position in the company [inaudible]. Generally,

I would presume that a Board of Directors meeting is a pretty important event for a CEO. Is that not correct? I mean, you had four

or five meetings a year?

Mr. SKILLING. A Board of Directors meeting, yes—I mean——

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Senator SNOWE. Right. So some of these issues obviously were

raised. I mean, some of—and you were in and out of some of these

meetings. Is that correct?

Mr. SKILLING. Which issues?

Senator SNOWE. Concerning some of the LJM transactions and

Raptors.

Mr. SKILLING. Absolutely. As I testified, I think we talked about

the LJM structures in multiple Board meetings and conflicts and

the process we put in place. The Board of Directors actually approved the structuring of the Raptor transactions. So, yes, there

was a tremendous amount of time spent on those.

Senator SNOWE. Okay. So you were familiar with the agenda and

what was going to be discussed at these Board of Directors meetings. Is that correct?

Mr. SKILLING. I think technically the Chairman of the Board sets

the agenda for the Board meetings. But——

Senator SNOWE. Yes, but doesn’t generally the CEO work with

the Chairman of the Board prior to that meeting?

Mr. SKILLING. Well, typically—you know, we had committee

meetings. And then you’d have the Board meeting. I believe the

agenda for the Board meeting was determined by the Chairman of

the company. And I believe the agenda of the subcommittees was

set by—I don’t know this as fact, but I believe it was set by the—

whoever the Chairman of that subcommittee was. So if you had the

Compensation Committee, the head of the Compensation Committee would set the agenda for the meeting.

Senator SNOWE. But would you go over the agenda? I’m just—

you know, for example, in some of these meetings—and I know it

might have been prior to the—I might be wrong in this, but when

Mr.—when the power went out, and you were in and out of the

room, and Mr. Fastow was making his presentation—I don’t know

if it was LJM2 partnership and you were in and out of——

Mr. SKILLING. It was actually a presentation proposing an LJM3

partnership, which, in fact, never occurred.

Senator SNOWE. Okay. But generally, the CEO is very well aware

of what’s going to be discussed.

Mr. SKILLING. I was not the Chief Executive Officer at that time

for that meeting. I became Chief Executive——

Senator SNOWE. Chief Operating Officer. You’re right.

Mr. HILER. For the record, if I might, and so we’re all clear, that

was also a Finance Committee meeting, I believe that October 2000

meeting that he testified about the lights being in and out. He was

not a member of the Finance Committee, although he may have

been there. So in terms of distinguishing that from a Board meeting, it may be important.

Senator SNOWE. Okay. But, I guess the point is here that there’s

a question of whether or not—to what extent you might have been

aware of the nature of these transactions that might imperil the

company. But you’re generally saying you had no awareness. Is

that correct?

Mr. SKILLING. No, I didn’t say that. I said that, at multiple Board

meetings, we spent a lot of time—it’s in the minutes. You’ll see

that there’s an enormous amount of time that was spent discussing—for example, in LJM1, the actual specifics of the transVerDate 03-FEB-2003 08:49 Sep 29, 2005 Jkt 088896 PO 00000 Frm 00061 Fmt 6601 Sfmt 6601 D:\DOCS\88896.TXT SSC1 PsN: SSC1
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action that was approved by the Board. When LJM2 was approved,

there was a long discussion of the potential conflicts of interest

that would be created and what sort of process we needed to put

in place to eliminate those conflicts of interest.

In the Raptor transactions, there’s—I think it’s in the Board minutes, you’ll see that there’s actually a Board—what do you call it?

It’s a resolution, thank you—a full resolution that actually put in

place the mechanics or the structure in place——

Senator SNOWE. Right.

Mr. SKILLING [continuing]. Of Raptor. So, yes, the Board spent

a significant amount of time——

Senator SNOWE. And you’re saying in the Raptors that you were

obviously directly involved in that, were you not?

Mr. SKILLING. I was—yeah, I was in the Board meeting, yes.

Senator SNOWE. Were you directly involved? I mean, obviously,

you were at the meeting.

Mr. SKILLING. I was at the Board meeting, I would have been involved.

Senator SNOWE. Okay, because the Powers Report said the

Raptors were created in response to Skilling’s desire to divide the

mechanism that would allow Enron to hedge a portion of its merchant investment portfolio.

Mr. SKILLING. Yes.

Senator SNOWE. And you’re saying that your signature was not

required for——

Mr. SKILLING. Well, what the—I think what the Powers Report

is referring to, which is absolutely true, is we had a large portion

of our business was mark-to-market or fair-value accounting. For

any of the mark-to-market or fair-value accounting areas of the

company, I insisted that we hedge those positions. And we used to

have discussions about the mechanics of hedging our natural gas

portfolios, our electricity portfolios—we got in pulp and paper, how

we hedged that—our telecommunications portfolios.

And this related to the equity investments we were making, and

I was very interested in getting a hedge on those, because I believed that—I mean, we’d made some tremendous investments.

We’d invested—I don’t even know what the number is, $40 or $50

million—and they were worth half-a-billion dollars. And so, I was

very adamant that we needed to come up with some mechanism to

hedge those.

And we looked at a couple of different alternatives for hedging

those and decided, upon discussions with our technical people and

our accountants and lawyers, that the Raptors structure was the

best one.

Senator SNOWE. But I guess the fact is that you had no question—I mean, you might have had some questions on the mechanics and so on, but not in terms of what these partnerships might

represent—and the fact that you deferred to accountants, with respect to their recommendation. Is that correct?

Mr. SKILLING. We looked, as the Board and management always

looks to their accountants to tell us what the accounting structure

is, as we look to our lawyers to approve whether the contracts are

correctly drafted and enforced—yes.

59

Senator SNOWE. Well, there was an article that was written in

Fortune magazine back in December by Bethany McClain, and she

talks about a meeting—I gather it was an analyst conversation—

in which she raised, I think—she said, ‘‘fairly standard queries in

an effort to understand fairly incomprehensible financial statements. The response from Enron was anything but standard.

Skilling quickly became frustrated and said the line of inquiry was

unethical and hung up the phone.’’

I guess the point is, here, you relied on accountants for their best

analysis of these partnerships. Why would you question an analyst

or a reporter with respect to your financial transactions that they

may be relying on accountants or other experts to try to understand Enron’s financial statement?

Mr. SKILLING. Is what you’re asking is why did I call Bethany

McClain unethical? Is that the question?

Senator SNOWE. Yes.

Mr. SKILLING. Um.

Senator SNOWE. Obviously, she had some legitimate inquiries.

The line of questioning was unethical.

Mr. SKILLING. There’s—and I don’t know if we want to——

Senator SNOWE. And she made the——

Mr. SKILLING. I don’t know if we want to waste the time of this

Committee. It’s——

Senator SNOWE. Well——

Mr. SKILLING. I am under oath in the House describing that telephone conversation. There have been a number of things that have

happened subsequent to that, so I guess I have some additional information. But Ms. McClain had been working on the article—I

said, in my testimony at the House, for a week. I think she came

out in Fortune magazine the next week and said, no, that she’d actually been working on it for a month. So I’m sorry, it was a month

that she was working on it, not a week.

She called up and said that she wanted my comments as she was

finishing that article and needed 15 minutes of my time. And as

I recall, that meeting was set up—it was on a—I think it was a

Monday or a Tuesday, and we carved 15 minutes out of my calendar, which sometimes is a very tough thing to do. So we carved

15 minutes out of my calendar.

Ms. McClain called me and started asking some very technical

questions about our accounting. I said, ‘‘Look, you know, I’ve got

6 minutes left now before I have to leave for a meeting, and I’m

not an accountant. I think we need to get our accounting people

and our risk-management people and our finance people together

with you to describe the specifics of what you’re asking.’’ And she

said, ‘‘Well, we’re going to run the story anyway.’’ And I said, ‘‘If

you do that, I think that’s unethical.’’

And she said that she would give us one more day—I think either she did or our PR people followed up afterwards. And we sent

our Chief Accounting Officer, our Chief Financial Officer, and our

head of Government Relations to New York to meet with her personally to answer. They spent, I think, a full day, or four or five

hours that day, discussing the specific questions she had.

I believe that that was ethical at that point, to listen. You know,

not—I mean, you all, I’m sure, in your business have been amVerDate 03-FEB-2003 08:49 Sep 29, 2005 Jkt 088896 PO 00000 Frm 00063 Fmt 6601 Sfmt 6601 D:\DOCS\88896.TXT SSC1 PsN: SSC1
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bushed by reporters before, and this struck me as a potential ambush. I asked them to please give us time and let us get the appropriate people to answer the question to New York to answer questions.

Senator SNOWE. Well, I guess it gets back to the whole issue of

why none of these events raised a red flag. I think it’s just very

difficult to comprehend, to be honest with you. And, you know,

these rewriting of losses—I mean, just shortly after your departure—I mean, significant write-downs. And not to be aware at all,

in any way, at any level about the impact of these partnerships on

the financial picture of this company is just really hard to understand. You may well say that you didn’t understand, you didn’t

know, you didn’t realize, or whatever, but it’s such a massive scale,

and I think that’s the difficulty understanding—comprehending

your lack of awareness.

Mr. SKILLING. Senator, I think you can go back again and look

at the dates. I left Enron Corporation on August 14. Ms. Watkins

had not yet made public her concerns. You can look at the Vinson

& Elkins interview of the head of Arthur Andersen’s account of

Enron. And I think that was in early September—and he said that

it was entirely appropriate and done properly. So the fact that I

had no reason to believe that there was a problem there is not particularly surprising, I don’t think.

Senator SNOWE. Thank you.

Senator DORGAN. Mr. Skilling, did you have any equity shares or

any investment in any of the partnerships that have been discussed?

Mr. SKILLING. No, I did not.

Senator DORGAN. None.

Mr. HILER. Excuse me. I’m sorry. Could we——

Senator DORGAN. Oh, yeah. Yeah, let’s all be specific.

Mr. HILER. Which ones? LJM? Raptor?

Senator DORGAN. Did you have any investment in any of the

partnerships, the SPEs, that were affiliated with the company?

Mr. SKILLING. No, I did not.

Senator DORGAN. Alright. Mr. Skilling, I’ve sat here now for a

couple of hours, and I’ll tell you, it is unbelievable to me what

we’ve heard. Let me describe a bit of it to you.

You say: ‘‘I left Enron on August 14, 2001, for personal reasons.’’

You’re quoted in two different places as saying that. Well, Mr. Lay

says that he pressured you about that, and you said that you were

under a lot of pressure. Enron’s stock price was dropping, and you

could not do anything about it. And you said to The Wall Street

Journal, ‘‘I don’t think I would have felt the pressure to leave if

the stock price had stayed up.’’ Does that sound like somebody who

left for personal reasons?

Mr. SKILLING. Senator, I think I’d like to see Mr. Lay’s testimony, because I think it’s very clear in the discussion that Mr. Lay

had with the Special Committee that I had confided in him a number of personal reasons that were important for me, and that’s why

I was leaving, and he accepted those reasons.

Senator DORGAN. Did The Wall Street Journal misquote you,

then?

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Mr. SKILLING. I talked to The Wall Street Journal probably two—

I think it was two days after I had left, and we had a discussion

that lasted probably a half an hour, probably——

Senator DORGAN. Is it a misquote?

Mr. SKILLING. I’m sorry?

Senator DORGAN. Is it a misquote?

Mr. SKILLING. I think it was a mis-context. A personal decision

takes into account many, many factors. I absolutely can admit to

you that I was frustrated with the stock price. I thought the company was in good shape and could not—it was bothering me that,

in spite of the condition I thought the company was in, the stock

price was going down. I found that——

Senator DORGAN. You’ve told us that. But let me just say—you

said, ‘‘I did not believe the company was in financial peril.’’ Let me

read to you from the Powers Report, just a bit. Here’s what the

Board of Directors, which is the best face you’re going to put on

this—the Board of Directors of the company commissioned this

study. This is a best-face study. Here’s what they say: ‘‘The partnerships [inaudible] LJM1 and 2 were used by management to

enter into transactions it could not or would not do with unrelated

commercial entities. They were designed to accomplish favorable financial results, not to achieve bonafide economic objectives or to

transfer risk. Some transactions were designed so that had they

followed applicable accounting rules, Enron could have kept assets

and liabilities, especially debt, off its balance sheet. But the transactions did not follow the rules. They allowed Enron to conceal

from the market very large losses resulting from Enron’s merchant

investments by creating an appearance that those investments

were hedged—that is that a third party was obligated to pay Enron

the amount of the losses—when, in fact, the third party was simply

an entity in which only Enron had a substantial economic stake.

We believe these transactions resulted in Enron reporting earnings

from the third quarter of 2000 through the third quarter of 2001

that were almost $1 billion higher than should have been reported.’’

Mr. Skilling, what is unbelievable to me is that a CEO says,

‘‘When I left, things were just fine,’’ and, ‘‘I have no knowledge of

any of this.’’ Is it the case that you have no knowledge that any

of this was going on, that Mr. Fastow was a renegade running off

by himself? You didn’t know that Chewco didn’t meet the 3-percent

test?

Mr. SKILLING. [Inaudible].

Senator DORGAN. Do you tell us that you were in charge of the

company but had no knowledge of this?

Mr. SKILLING. Okay, let’s——

Senator DORGAN. Is that what we’re to believe?

Mr. SKILLING [continuing]. Let’s go through the specifics. Start

with Chewco. Did I know that Chewco was undercapitalized? No,

sir, I did not know Chewco was undercapitalized.

Senator DORGAN. So did someone lie to you about that? If so,

who?

Mr. SKILLING. The accountants believed that it was properly capitalized. And, as I understand it, Enron’s—and this—I’ve just——

62

Senator DORGAN. The accountants have said that they were lied

to.

Mr. SKILLING. You’ll have to ask the accountants. I can’t speak

for the accountants. I did not know.

Senator DORGAN. But you can speak for the company.

Mr. SKILLING. I can speak for myself. If you asked me did I

know——

Senator DORGAN. You were the CEO of the company. You can

speak for the company at that point.

Mr. SKILLING. I can speak for myself. I can speak as Chief Operating Officer of the company. I did not know—personally did not

know that Chewco was undercapitalized.

Senator DORGAN. Now that you know, was your exit statement

an appropriate one?

Mr. SKILLING. I’m sorry?

Senator DORGAN. Your exit statement, that things were just fine

when you left Enron—was that appropriate, now that you know

what you know?

Mr. SKILLING. Well, in fact, dealing specifically with Chewco,

what ended up happening is they reconsolidated Chewco. That

would have no—essentially all you’re doing is bringing—it’s an accounting adjustment. It wouldn’t have an impact on cash flow or

earnings.

Senator DORGAN. I’m not talking just about Chewco. I’m talking

about the Board of Directors report. The Board of Directors report

said that you were heading a company that was reporting earnings

that it didn’t earn and keeping debt off the books that, in fact, related to risk for the company.

Mr. SKILLING. Mr. Chairman, all I can tell you is that the accountants signed off that they were accurate records. I believed

they were the accurate representation of the financial——

Senator DORGAN. Ms. Watkins, what’s wrong with that statement: ‘‘Gee, the accountants told me it was fine, so it was fine’’?

Ms. WATKINS. The concern I have is that I do agree with Mr.

Skilling that he was quite concerned about the risk inherent in our

merchant equity portfolio. If we made an investment, that investment went up and we wrote that up. He was very concerned that

we might also have to write it down.

I worked with him on a committee in 1996 where we tried to devise equity hedging methods for our investments. We tried things

like puts on the S&P, shorting a basket of expiration and production companies. Nothing quite got us dollar-for-dollar coverage.

After I left that position at the end of 1996, my understanding

is that several other people, at Mr. Skilling’s behest, tried to find

a way of hedging our equity investments. When you attempt to go

to outside third parties in 1996 and 1997 and 1998, and you can’t

find a way of doing it, and then miraculously you’ve got a dollarfor-dollar hedge from Mr. Fastow’s related-party partnership that

would have been a very, very high risk venture. I find it hard to

believe that Mr. Skilling was not aware that something was amiss,

that this could not be legitimate.

Senator DORGAN. Mr. Skilling, let me ask if you are aware of a

May 6, 2001, piece—it’s called Off Wall Street—in which——

Mr. SKILLING. I’m sorry, I can’t see it, Senator.

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Senator DORGAN. Alright, I can send it to you. But Off Wall

Street recommended a strong sell position for Enron, a target of

$30 per share. Were you familiar with that in May of 2001?

Mr. SKILLING. Who was it?

Senator DORGAN. It’s called Off Wall Street Consulting Group.

Mr. SKILLING. I don’t know them. May I ask a favor?

Senator DORGAN. Yes.

Mr. SKILLING. May I address the comments Ms. Watkins just

made?

Senator DORGAN. Alright.

Mr. SKILLING. Ms. Watkins is correct, that we would not have

been able to go outside and directly hedge the high-technology investments. It had nothing to do with the fact that that wasn’t

available. It had everything to do with the fact that we were under

hold agreements with those stocks because we had made venture

capital investments.

So we had two alternatives at that point. One was to do what

we call a low-correlation hedge, which is what Ms. Watkins is talking about—that we used to execute in the oil and gas business.

That means you can’t do a one-for-one tie. And so, what you do is,

if you own a bunch of high-technology fiber optic companies, you

short a basket of fiber optic companies. And it’s not a one-to-one

correlation. In retrospect, it would have been a fantastic correlation. It would have completely hedged the position.

At that time, we also had people working on other alternatives.

And the other alternative was the Raptor structure. A Raptor

structure is a different kind of hedge. In most hedges, if you go to

Goldman Sachs and you buy a put on a company, they effectively

go into the marketplace and offset that with a direct transaction

that is an offset transaction to that.

There’s another way that you could write a derivative, and that

is if you put capital into a business, and they’re basically writing—

in the industry, it’s called a ‘‘naked hedge.’’ A naked hedge.

So we—basically, we could either do a low-correlation hedge,

which would have worked out fine, or we could have done this

thing, which was called a ‘‘naked hedge.’’ And you take credit risk

on a naked hedge. And we just looked at the two of those and decided—our technical people thought that that was the better hedge

to enter into.

So, did I believe this was an appropriate hedge? Yes, I absolutely

did. And if the accountants had ever, at any time, suggested that

this was inappropriate for any reason, we would have just gone to

a low-correlation hedge, as we did in the oil and gas business. That

was the standard hedging structure that we used at that time.

Senator DORGAN. Mr. Skilling, you seem to know more about accounting and finance than you let on when you describe these

hedge transactions.

Mr. SKILLING. I know about the derivatives. I know about the finance business, because I spent a lot of time in the finance business. I do not—I’d like to say one other thing. We were asking

about what needs to be done. I also agree with Ms. Watkins in her

testimony in front of the House that the accounting profession has

gone through a morphing. It’s gone from a morphing of logic to

something that looks more like the tax code. And it’s gotten to the

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point where I think someone in anyone’s position has to be a specialist to understand the mechanics of what’s going on, because

there are so many rules that have been promulgated. And that’s

something you might want to think about. We ought to go back to

the European structure, where it’s more what makes sense than

what the specific rules are that govern transactions.

Senator DORGAN. But, Mr. Skilling, with due respect, I’m not

going to ask you what needs to be done. I’m much more interested

in asking you what was done and was not done inside that corporation. I’ll get advice on what we ought to do in the future from others.

But let me ask a question about compensation that relates to

your resignation and other things that were going on inside the

company. I described the Powers Report, which I think is the best

face you can put on what was going on in the company, and it described something rotten, in my judgment. Now, during that period

of time, February 1999 to June 2001, did you convert stock worth

$66 million at that point? Did you sell $66 million in stock sales?

Mr. SKILLING. What was the timeframe?

Senator DORGAN. February 1999 to June 2001.

Mr. SKILLING. 2001. I don’t know, but—I don’t have the records

with me.

Senator DORGAN. Would that be surprising to you learn that you

did that?

Mr. SKILLING. No, that would—no, that would not be surprising.

Senator DORGAN. And do you consider $66 million a great deal

of money?

Mr. SKILLING. Yes, it is, sir.

Senator DORGAN. Do you still have most of that?

Mr. SKILLING. Yes, I do.

Senator DORGAN. Uh-huh. And how do you feel about that and the employees, one of which wrote me recently—they had $330,000

in his 401(k) account—his entire life savings—worked many years

for your company, lives in the State of North Dakota—that

$330,000 is now worth $1,700. You still have most of your $66 million. That family has lost their life savings. How do we reconcile

this? How is it that the people at the top got wealthy, and the people at the bottom got broke?

Mr. SKILLING. Well, if—I guess a couple of answers to it. I had

a—I had a program for many, many years of selling a modest portion of my stock. And over many years that’s added up to that

number that you’ve talked about, Senator.

I think most employees also sold stock options and stock as those

became due, as they—you know, as they matured. So I would guess

that most people did, in fact, over the years, if they were diversifying and prudently managing their investments probably did sell

some of their Enron stock. I feel terrible that people that held the

stock held the stock at the beginning of this year. I had stock and options worth $170 million, which is a whole lot of money. And I sold $15 million under an SEC 10(b)5 plan between January and when I left the company on August 14—$15

million out of $171 million. I think if I thought that there was a

concern, I would imagine any economic advisor would say you probably should have sold more, diversified more.

65

But I think it’s very tough. I mean, I don’t know what to say to

the employees.

Senator DORGAN. Have you donated any of that money to the employees’ fund?

Mr. SKILLING. I can’t do anything at this point. I think at this

point I have 36 separate plaintiffs’ lawsuits against me. It’s my expectation that I will probably spend the next five to ten years of

my life battling those lawsuits. I don’t know if I’ll have anything

at the end of that, and I can’t transfer anything now, because at

this point that would be considered—it’s a legal issue that I’m

going to have to deal with, but it’s going to be a long, drawn-out

process.

Senator DORGAN. One final question. I assume you probably regret the joke that you told in Las Vegas about the Titanic and the

State of California. You were quoted as saying: ‘‘You know the difference between the Titanic and the State of California? When the

Titanic went down, the lights were still on,’’ which I assume you

regret saying now.

But it occurs to me that, at least from those of us who are examining what happened at Enron—if one were to make a similar comparison, in the Titanic, the captain went down with the ship. In

Enron, it looks to me like the captain first gave himself and some

friends a bonus, then lowered himself and the top folks down in the

lifeboat, and then hollered up and said, ‘‘By the way, everything is

going to be just fine.’’

Do you now regret what you said about the Titanic and California, given what’s happened with Enron itself?

Mr. SKILLING. Okay, two issues. One on regretting the joke, and

I will address that.

The second one is—I think is a pretty bad analogy, Senator, because I wasn’t on the Titanic. I got off in Ireland because I was on

vacation in Ireland, and the Titanic went on to run into some troubles later on. I think that’s a better analogy.

As far as the joke related to the Titanic, all I can say is that that

was at a time of very, very frayed tempers as a result of the situation that was going on in the State of California. One week prior

to that meeting in Las Vegas where I made that statement, the

highest law official in the State of California, Attorney General Bill

Lockyer said, and let me quote: ‘‘I would love to personally escort

Ken Lay to an 8-by-10 cell that he could share with a tattooed dude

who says, quote, ‘Hi, my name is Spike, honey.’ ’’

That was May 22, 2001. That was the kind of stuff that was

going on. Can you imagine what tempers were like? I know Mr.

Lay. I’ve worked with Mr. Lay for a long time. Mr. Lay doesn’t deserve a prison rape or the suggestion by the top law enforcement

official in the State of California that he be raped in prison when

he hadn’t been charged with anything and hadn’t been found guilty

of any issue.

Senator DORGAN. Let me inquire before we continue, is there

anyone on the panel that would require a 5-minute break at this

moment? If not, we will continue.

Senator Fitzgerald.

Mr. HILER. Mr. Chairman——

Senator DORGAN. Pardon me?

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Mr. HILER. Can we take a 5-minute break?

Senator DORGAN. Alright, we’ll stand in recess for 5 minutes.

[Recess].

Senator DORGAN. The Senator from Illinois.

Senator FITZGERALD. Thank you, Mr. Chairman.

Mr. Skilling, I was glad that you recognized the issue about stock

options and the expense for them not having to appear on the income statement. I’ve actually introduced a bill that would require

companies to expense those options.

I wanted to ask you a little bit about the budgets within Enron.

Were there earnings budgets within Enron? And, if so, who put together those budgets and who enforced those budgets or tried to

make sure the various divisions met their budget numbers?

Mr. SKILLING. The process we had, I think, was probably——

Senator FITZGERALD. Could you pull the microphone close?

Thank you.

Mr. SKILLING. I think the process we had was fairly standard.

We’d do an annual budget for the upcoming year where each of the

business units would build up, you know, from what they thought

they could accomplish in the upcoming year. And all those were

consolidated, and that was approved by the Board of Directors as

the budget for the upcoming year.

And then every quarter, we had a forecast, and the forecast was

a basically a rolling forecast so that as each day passed by and

there was updates on how the markets were working and how we

were doing in the markets, the forecasts would be adjusted so that,

for example, if one of the business units was having trouble—like

in Brazil, for example—we had a lot of troubles in Brazil—as their

numbers went down, but somebody else was doing better because

of whatever——

Senator FITZGERALD. Were you ever involved in approving any

budgets for any of the divisions of Enron?

Mr. SKILLING. The budgets went to the Board of Directors for approval.

Senator FITZGERALD. Did they go to you first?

Mr. SKILLING. We prepared—we, meaning Ken and I, would sit

through all the budget—each of the individual business units

would come in, and they would——

Senator FITZGERALD. Did you and Mr. Lay ever ask any of the

divisions to budget to earn more monies than they had proposed?

Mr. SKILLING. Yes, sir.

Senator FITZGERALD. You did. Often? Or was that a rare occasion

that you would ask them?

Mr. SKILLING. Well, I think—you know, you use business judgment, and there were some times—there’s a term in the budgeting

process that’s called ‘‘sandbagging,’’ you know, and if you had a

reason to believe that a business had better prospects, you’d say,

‘‘I think you guys are undershooting what you can actually accomplish.’’ But it didn’t mean that they were stuck with that. During

the upcoming year, then, as each forecast was done, if it turned out

that there was a problem in the business or there was an opportunity in a business, then those numbers would be adjusted.

Senator FITZGERALD. So you and Mr. Lay would approve the

budgets and then they would go to a Board for further approval?

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Mr. SKILLING. Yes, sir.

Senator FITZGERALD. And were there ever occasions when certain

units weren’t meeting their budgets?

Mr. SKILLING. Yes, sir.

Senator FITZGERALD. And would you ever—what would you do if

certain units weren’t meeting their budgets? Would you just say,

‘‘That’s okay,’’ or would you ever ask them to—you know, ‘‘Come

on, meet your budget. You guys got to get the revenues up, the

sales up. You’ve got to meet your budgets for the year.’’

Mr. SKILLING. Well, what we would do is—I would typically

meet, and Ken would meet, and others of top management would

meet with each of the individual strategic business units. These are

the product-market businesses in each of them. And if one productmarket group was not performing, there would be a review, either

by their boss or their boss—depending on how—you know, what

the situation was.

Senator FITZGERALD. Did you and Mr. Lay ever pressure any

unit to——

Mr. HILER. Senator, I’m sorry. With all due respect, I apologize

for interrupting. Could he answer that? I think it’s important to go

through the whole——

Senator FITZGERALD. Yeah, but he’s answering more than I’ve

asked, and I have other questions. I’d like if he could answer my

question specifically and not waste the five minutes I have getting

off onto irrelevancies.

Mr. SKILLING. I don’t believe it’s irrelevant, because the purpose

of these meetings that I was just describing is—there’s one of two

things going on. Either the business unit has a problem in the marketplace or a business unit has a problem in execution. And what

we were trying to do is just separate those.

If there’s a problem in the marketplace, there’s nothing you can

do about it. And so you just—okay, fine. If it’s an execution problem, it might mean that they needed more people or they needed

more resources or you needed to change management.

So what you would try to do is divine what’s the basis of the

problem if there was a problem and then come up with a remedial

action to——

Senator FITZGERALD. Did you ever pressure any units to increase

their earnings to as to meet their budgets?

Mr. SKILLING. I would not use that term at all. I think what we

did is—we went through—in the budgeting process, if a business

unit had a problem and they were working hard on the problem,

that was fine. And then what we did is—we’d look elsewhere in the

organization for someone whose market was doing better than we

expected, to offset that.

Senator FITZGERALD. Would compensation be affected with any

unit if they didn’t meet their budget?

Mr. SKILLING. We had a compensation system that did not have

a formulaic component. In other words, the specific profitability of

a business unit did not dictate what your bonus was. In fact, if you

look at the people who are in our number one category, our best

people, my recollection is that probably half of them were in business units that were losing money. And we’d put good people in

businesses that were just starting up or businesses that had probVerDate 03-FEB-2003 08:49 Sep 29, 2005 Jkt 088896 PO 00000 Frm 00071 Fmt 6601 Sfmt 6601 D:\DOCS\88896.TXT SSC1 PsN: SSC1
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lems. And if we didn’t pay them because they were in one of those

businesses, they’d leave, and we didn’t—certainly didn’t want our

good people to leave.

Senator FITZGERALD. Now, also—another area I want to ask you

about, Mr. Skilling, is valuations. There’s been a lot of testimony

that the LJMs and other partnerships were set up in order to—

both to hedge certain investments in Enron’s portfolio, but also to

buy certain assets from Enron. Enron would, from time to time,

sell assets to these partnerships. Who would ensure that the valuation of the asset sold to the partnerships was appropriate and fair,

from Enron’s standpoint if you’re selling an asset to a partnership?

Mr. SKILLING. The process that was established left it to Rick

Causey, who was head of our accounting group, and Rick Buy, who

is head of our Risk Assessment and Control Group, to determine

the reasonableness of the transaction. The Risk Assessment and

Control Group had several hundred—I don’t—maybe 300 analysts.

They would do the analysis of the assets to determine——

Senator FITZGERALD. Was there a maximum level of authority for

those two?

Mr. SKILLING. I’m sorry?

Senator FITZGERALD. For Mr. Causey and Mr. Buy. Did they

have a—could they value any sale of any asset that Enron owned

and no one else would have to review that?

Mr. SKILLING. Under the terms of the LJM process, they had to

review and sign-off on those transactions. If the transaction involved a cash outlay of a certain amount or a sale of a certain

amount, there was a hierarchy of sign-off within the company that

would be necessary. So——

Senator FITZGERALD. At what level did your sign-off kick in?

Mr. SKILLING. Oh, it changed over the time I was there. I’m

guessing probably, at the end—I don’t know the exact number—say

$50 million or $60 million.

Senator FITZGERALD. So $60 million. Now, on the sale of the

Enron——

Mr. SKILLING. I’m sorry. That would be for a purchase. For a

sale, I don’t—I think that the authority levels were higher, because, you know, we tended to prefer sales to purchases.

Senator FITZGERALD. And you’re not sure what that was.

Mr. SKILLING. I don’t remember.

Senator FITZGERALD. Now, do you recall the sale of Enron’s business with Blockbuster Video—the Enron broadband video business

that they sold to the partnership called Braveheart?

Mr. SKILLING. Was LJM involved in Braveheart?

Senator FITZGERALD. Pardon?

Mr. SKILLING. Was LJM involved in Braveheart?

Senator FITZGERALD. No. I didn’t say that it was.

Mr. SKILLING. Oh, okay. I thought you said—I thought that it

was a sale to a partnership.

Senator FITZGERALD. No. No, I’m just wondering if you recall the

sale of Enron’s broadband video business with Blockbuster to the

partnership known as Braveheart.

Mr. SKILLING. No, I didn’t know that it was sold to a partnership

named Braveheart, but I am familiar——

Senator FITZGERALD. Who did you think it was sold to?

69

Mr. SKILLING. I just didn’t recall. But I am aware of the sale of

a portion of the content business.

Senator FITZGERALD. Were you aware that it was sold to a partnership, Braveheart, that apparently had received an investment of

$115 million from the Canadian Imperial Bank of Commerce?

Mr. SKILLING. No, sir. I would have been aware of the fact that

a sale was made and—I don’t—I wouldn’t typically be involved in

the details of negotiating the transaction——

Senator FITZGERALD. Enron took $110 million in earnings over

two quarters for that transaction. You wouldn’t have been aware

of a transaction that would have comprised $110 million worth of

Enron earnings?

Mr. SKILLING. No, I didn’t say that. I was aware of the sale of

the content business—a portion of the content business. I thought

what you were asking me was—did I know that it was being sold

to a specific partnership and there’s a specific financial institution

involved. That would not be a level of detail that I would

typically——

Senator FITZGERALD. Alright, you were aware it was sold, but

you didn’t know it was sold to.

Mr. SKILLING. I wouldn’t know the specifics of the transaction.

Senator FITZGERALD. Okay, and have you heard of the

Braveheart partnership?

Mr. SKILLING. Yes.

Senator FITZGERALD. Are you——

Mr. SKILLING. I have not heard of the Braveheart partnership.

I’ve heard of a term—I’ve read in the newspaper, like everyone

else—where they call it Braveheart. I did not know it was its own

stand-alone partnership.

Senator FITZGERALD. Well, I guess my time is up. Thank you.

Senator DORGAN. Senator Wyden.

Senator WYDEN. Thank you.

Mr. Skilling, over the last four hours, you’ve essentially made

two arguments to the Committee. You said that you moved aggressively to manage economic risk, and you said that you relied on

your people. Those are essentially the two arguments that you’ve

made to us.

My question to begin this round with is, given the fact that the

stock price essentially fell by half during your watch, wouldn’t that

have been the point where you would stop relying on other people

and go out and independently investigate all of these problems and

try to get to the bottom of them?

Mr. SKILLING. Well, as I said, Senator, my assessment of the reason that the stock price was going down in that time period was

three things. One was the meltdown in the broadband business.

The second one was the problems we were having with our India

project. And the third one was the situation in California—the

California energy situation.

On all three of those things, I personally got very involved. In

the broadband business, we worked to reduce the capital expenditures in the business. We ended up redeploying a large portion of

the people from that business. On India, we had meetings, I think,

probably every week-and-a-half to two weeks to talk about what

our approach would be to the project and how we would manage

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that. And in California, we spent enormous amounts of time trying

to understand what our positions were—risk positions were in California and how we would manage them.

Senator WYDEN. What’s troubling to me about that is, you’re essentially saying all of these reasons that the company collapsed are

external—they’re outside the company. Yet all of these high level

people in Enron are saying there are internal problems.

Mr. SKILLING. No, sir. I——

Senator WYDEN. Do you still believe there weren’t any internal

problems that you should have been tackling?

Mr. SKILLING. No, sir. I believe that this—when I mentioned this

run on the bank—I mean, a run on the bank just doesn’t happen.

Subsequent to when I left the company, there was a loss of confidence in the company that led to the run on the bank. Was that

related to the LJM partnerships and some of the off-balance-sheet

vehicles? I think that probably had a significant piece to do with

it, because it seemed to be what the press was focusing——

Senator WYDEN. Let’s stay with your role, then. That’s helpful.

Mr. McMahon, you did bring to Mr. Skilling your concerns about

the various processes and your concerns specifically about the

shortcomings involved. Mr. Skilling has said today that he went to

Mr. Fastow, and he felt that those concerns were addressed. What

evidence did you see that Mr. Skilling, on his watch, adequately

moved to address these conflict-of-interest issues?

Mr. MCMAHON. Well, there’s a couple of issues. One, I know

firsthand Mr. Skilling—well, I guess not firsthand—secondhand

that Mr. Skilling did, in fact, have a conversation with Mr. Fastow,

as Mr. Fastow, as soon as that conversation was over, called me

to his office immediately to tell me that he was concerned whether

we could continue to work together anymore. So clearly there’s—

a conversation was had between Mr. Skilling and Mr. Fastow.

And even prior to that, Mr. Sutton, who was Vice Chairman of

the company, a day after I met with Mr. Skilling, called me into

a meeting and said that he had been delegated by Mr. Skilling with

the job of dealing with this conflict. So I do know he had some conversations with people after our meeting.

Senator WYDEN. Are you saying, then, to the Committee, you are

satisfied that Mr. Skilling moved to deal with these conflicts-of-interest questions?

Mr. MCMAHON. I don’t think I’m saying that. Frankly, within

three or four weeks after all that, I found myself in a different job

in the company, and a new treasurer was brought on, and I just

wasn’t close to the situation anymore. So I really don’t know what

occurred after that point in time.

Senator WYDEN. Mr. Skilling, again using the Powers Report, it

contrasts pretty sharply with what you’ve said about the processes

for dealing with conflicts, and the processes that were in place with

respect to the company overall. The Powers Report says that company insiders were enriched by tens of millions of dollars at the expense of shareholders. That doesn’t sound to me like the conflictof-interest processes and other processes were working particularly

well. Do you? You said the processes were in place, that you trusted them.

71

Mr. SKILLING. Yes, sir, that’s what I’ve said. If it turns out that

one penny was taken from Enron shareholders that was not deserved by anyone, I would be angry about that. I have no more information about the specifics of the numbers you just mentioned

than you do. I read the same newspapers.

I think—I think it ought to be looked at. And if, for any reason,

Enron’s shareholders were abused, then there ought to be appropriate action taken.

Senator WYDEN. With respect to your duties at the company, at

this point, it is not clear how you spent your time. I mean, you

have talked, for example, about how this was a new company, this

was a company with, ‘‘light assets,’’ and certainly there are a lot

of people in my home state now that wish they had hard assets and

had seen some hard profits. But, you talked about this being a new

company. You said that, in effect, you relied on others, that there

were processes in place.

Tell us what you did, in your view, to make these substantial sums. I’ve gathered there are some reports that you made $100

million as the top officer of Enron. I don’t know whether that’s correct or not. But what, in your view, given the fact that you didn’t

do any independent inquiry of the conflicts of interest, that you relied on what people were telling you, we saw working-class people

get shellacked by it—what did you exactly do to earn these very

significant sums at the company?

Mr. SKILLING. Senator, I described this to the Securities and Exchange Commission. Let me see if I can do it quickly, because I

know you’re in a rush on this. But I would say, by the time I became CEO, probably 40 percent of my time was involved in strategic business decisionmaking. I tried to meet with each of our

strategic business units, each of our businesses.

And I think at that time, if you look at—we had five segments,

there were multiple businesses within each of those segments—we

probably had 40 to 50 businesses that were operating inside the

company. I would try to meet with those businesses on a frequent

basis to understand what was going on, which markets they were

going after, what problems they had, what resources they needed

to be successful, and so forth. And that involved enormous travel.

I was probably out of town 50 percent of the time visiting businesses. We had operations in Europe. We had operations in Asia,

operations in South America. That was 40 percent of the time.

Thirty percent of the time was various policy issues. Our trading

controls policy, for example, was a very complex, very time-consuming process where we were managing the positions and exposures that could be taken by various groups within the company,

and that had to be reviewed on a daily basis to understand what

the issues were so that we could manage that.

Also, with those policy issues, personnel—I would imagine of that

30 percent on policy, 20 percent of the time was spent in discussions with our key people or trying to attract new talent to the

company or redeploying people from one organizational unit to another to help keep the businesses growing. So that was about 70

percent of the time. And I’ll tell you, that was a lot of hard work.

The third component, probably 30 percent of the time are what

I would call special issues that were kind of timely issues that

72

needed to be dealt with. And when I became Chief Operating Officer, that was primarily JBLOC, which was a large contract we had

some serious problems with in the United Kingdom that needed to

be negotiated in 1998 and 1999, reducing the amount of capital we

were spending in the international markets because we were not

earning compensatory rate of return on that business. 1999 and

2000, it was the startup of our broadband business and trying to

get that up and running and a number of new businesses. In fact,

Jeff ran our new industrial products business where we were starting to take the same business model—we had natural gas and electricity—and move it to some new—some other businesses.

And then in the year 2001, dealing with California, dealing with

the broadband business that we had an issue with, and trying to

sell and monetize international assets so we could bring more liquidity to the company.

Senator WYDEN. Well, those all look like useful strategic kinds

of matters, but it sure looks to me like they’re nowhere near as important as having in place a strategy for dealing with these conflicts of interest that look like they were just oozing all over the

place. And——

Mr. SKILLING. Sir, we—I mean, we did. We had a control system

in place that we believed—the Board and we believed would manage it. And you, again, go back to the minutes, and you’ll see that

we spent a lot of time talking about it. We were aware of it. We

spent a lot of effort to manage that conflict. We did spend time on

it.

Senator WYDEN. I want to ask one other question. You’ll obviously have to convince a lot of courts and a lot of governmental

agencies, but it certainly runs contrary to those people who were

inside the company, who ticked off warning after warning. I outlined that four hours ago, and that’s why it is so hard and so implausible to believe what we’re hearing today.

One question for you, Ms. Watkins. I wrote a law a number of

years ago that requires accountants to look for fraud and to have

in place rules to bring it to the attention of government regulators.

Now, you had some dealings with accountants all through the process, and you thought, by your words, that Enron was going to implode in accounting scandals.

I’m not going to ask you to comment on the law and be a lawyer,

but does it sound to you like the company was complying in a, sort

of, conceptual way with a set of rules and laws that say you’ve got

to look for fraud and bring them to the attention of management

and, if not corrected, to the regulators?

Ms. WATKINS. Well, what concerns me about some of the things

that have come to light since this past fall, mainly from the documents from the various congressional inquiries into Enron, is that

Enron itself had as one of its main risks associated with the Raptor

deals is accounting scrutiny. Additionally, we have discovered that

Arthur Andersen had a memo to the files dated February 2001

where they were concerned about the propriety of this. I do not understand why Andersen did not go to Enron’s Audit Committee

with their concerns. I am concerned any time that accounting scrutiny is at the top of the list of a risk associated with a structure.

73

Senator WYDEN. Well, what is important about that is there is

a Federal law on the books, it was on the books all through that,

that requires that when Arthur Andersen has any reason to believe

that there is questionable activity, potentially fraudulent activity,

that they do just what you were talking about. I appreciate your

confirming certainly my opinion at this point that they should have

done it and it was not done.

Thank you, Mr. Chairman.

Senator DORGAN. Senator Boxer.

Senator BOXER. Thank you.

Mr. Skilling, you worked very hard at Enron; and given your own

testimony, night and day. One of the reasons you left, you were

working too hard. We understand what that is to not have enough

time for family, et cetera. You’re also very smart. And that’s why

I do not believe you when you say you did not know what was

going on, because you had people with lesser education; you had

people with less access to the documents, less access to the meetings, to the people making the decisions, who knew exactly what

was happening.

I showed you a videotape where you and Ms. Olson tell employees in December 1999 to put all their 401(k) plan monies into

Enron. She turned to you after she said absolutely do it, you smiled

and nodded very, very clearly. At that time, you had sold over

500,000 shares of stock for $21,928,000.

When I said that, you questioned me. We got the actual SEC filings with your signatures on them. I would like to put those in the

record if I might, the SEC filings. That was a third, Mr. Skilling,

a third of the stock you would eventually sell. So it was not just

a little bit of the stock. At the time when you were telling your

hard working employees, for whom you profess to feel much grief

and sorrow right now, to put all their 401(k) monies into Enron,

you had already sold a third of the stock you would eventually sell.

And I want to point out that Ms. Olson, Mr. Chairman, Ms.

Olson, who led the cheering rally there for Enron stock, two

months after she told people to put their money in Enron stock she

started to sell off her stock as well. I ask unanimous consent to put

that filing into the record.

Senator DORGAN. Without objection.

Senator BOXER. Mr. Chairman, as a Member of the Consumer Affairs Subcommittee of the Commerce Committee, I care about the

little guy. And I will tell you if you look at this, it is asymmetry

here. The people who put their money into the 401(k) plans lost

about a billion, the insiders gained about a billion. That is asymmetry. That is an unfair share of pain, suffering, and loss of

dreams, and that is why I think it is so important that we hold this

hearing. Let us not forget why we are here.

Now I just want to follow up on my Chairman’s comments on the

Off Wall Street Consulting Group. Mr. Skilling, do you know this

group? Have you ever heard of them?

Mr. SKILLING. I do not.

Senator BOXER. You’ve never heard of them?

Mr. SKILLING. I do not think so. I do not recall.

Senator BOXER. You do not recall. Did anyone in your company

talk to you about what they said? This was May 2001, before you

74

left the company in August 2001. They put out a scathing evaluation of the company which I’ll read a little synopsis of.

Mr. SKILLING. I may have seen it, I do not recall.

Senator BOXER. You may have seen it?

Mr. SKILLING. Yeah.

Senator DORGAN. If you’ll refrain, let me ask that a copy of that

be delivered, because I did ask a question about it, as well. And

let us just ask that a copy be delivered.

Senator BOXER. There is a really important reason why I’m talking to you about this. Maybe your lawyer has that.

Mr. SKILLING. I’m sorry? Oh.

Senator BOXER. I’m asking you about this because you left the

company in August. You said it was in great shape. You kept on

selling your stocks before that time. You had really unloaded everything you were going to by that date. And here comes this analysis,

and if I could show you page 4 at the top—we’ll start at page 3

at the very bottom, because you keep saying it is complex, what

happened. Well, this is a clear explanation of what happened.

Mr. SKILLING. I’ve got no page 4.

Mr. HILER. Excuse me. We do not——

Senator BOXER. I’m sorry. It says ‘‘Because margins’’—it’s

actually——

Mr. SKILLING. I’ve got page 1, 2, 6.

Senator BOXER. Oh, he is missing page 3. Well, it is okay. I’m

only reading one sentence on page 3 and then we’ll get to page 4.

Mr. SKILLING. I’d like to see that if that is possible.

Mr. HILER. We do not have page 4.

Senator BOXER. He needs page 3 and 4.

Mr. SKILLING. I’ve just got pages——

Mr. HILER. We have 1, 2, 6——

Mr. SKILLING. I’m missing 3, 4 and 5.

Senator BOXER. Sorry about that.

Mr. HILER. That is okay.

Senator BOXER. We apologize.

Mr. HILER. While we’re waiting for that, ma’am——

Senator BOXER. No, it is right here. I just do not want to lose

my track.

Mr. HILER. Okay. Sorry.

Senator BOXER. Page 3. This is the analyst writing: ‘‘Because

margins on Enron’s incremental business are so thin, and because

it now takes’’—follow this—‘‘about $2.1 billion in additional

revenues——’’

Mr. SKILLING. I’m sorry, I’m——

Senator BOXER [continuing]. ‘‘Just to generate——

Mr. SKILLING. We were having a little altercation over here.

Senator BOXER. All right. I’ll start again.

Mr. SKILLING. Start over again.

Senator BOXER. Page 2 bottom.

Mr. SKILLING. Yeah.

Senator BOXER. ‘‘Because’’—this is the analyst from this—I understand that it is a very well respected group. ‘‘Because margins

on Enron’s incremental business are so thin, and because it now

takes about $2.1 billion in additional revenues.’’

Mr. SKILLING. I’m not catching it. On page—bottom of page 2?

75

Senator BOXER. It is the bottom of page 3——

Mr. SKILLING. Page 3, Okay.

Senator BOXER [continuing]. The last——

Mr. SKILLING. All right. Okay, gotcha.

Senator BOXER. I’m going to just start again. I hope I can add

on a couple of minutes here.

Mr. SKILLING. Okay.

Senator BOXER. ‘‘Because margins on Enron’s incremental business are so thin, and because it now takes about $2.1 billion in additional revenues just to generate an additional penny of after-tax

earnings, it probably should come as no surprise that Enron management appears to have resorted to a variety of transactions that

are of questionable quality and sustainability to manage and to

boost its earnings. These transactions appear to be purposely obscured in Enron’s public reporting.’’

I would ask unanimous consent that the summary of the report

be placed in the record.

[The information provided follows:]

SUMMARY

Enron’s business model has been evolving toward trading and risk management

services mainly for the energy market. Enron has been abandoning its energy producing physical assets in favor of trading assets.

Recently, Enron has had the best of both worlds. Booming energy markets have

maximized the value of its remaining physical assets, while high prices and increased volatility have created trading opportunities that have allowed the company

to increase revenue very substantially. After growing revenue by about $l0B year

over year in both 1998 and 1999, revenue growth exploded in 2000, as revenue rose

to $100B from $40B in 1999.

When revenue increased by $11B in 1998 versus 1997, gross profit increased by

$2B. When revenue increased by $9B in 1999 versus 1998, gross profit increased

by $0.5B. However, when revenue increased by $60B in 2000 versus 1999, gross

profit rose by only another $0.5B.

Gross margin as a percent of sales dropped from 13.3 percent in 1999 to 6.2 percent in 2000. However, the incremental gross margin dollars generated by the incremental sales year over year was just 1.52 percent of the incremental sales. Gross

margins have not been released for Q1 01, but operating profit rose by just $429M,

only 1 percent of the year over year sales increase of $37B.

Enron’s Wholesale segment accounted for 95 percent of Enron’s $l00B of revenue

and 71 percent of its IBITDA in 2000, versus 90 percent of revenue and 55 percent

of IBITDA in 1999. In Q1 01, Wholesale was 97 percent of revenue and 95 percent

of total IBIT. ENE total IBIT was just 1.6 percent of total revenue in Q1 01 versus

4.7 percent in Q1 00.

Wholesale, and trading in particular, has clearly become the Enron story. The

Wholesale division combines the results of Enron’s trading and risk management

business with results of various physical assets that the company own or controls.

Enron does not break out gross margin or operating profit by these two types of

Wholesale operations. EnronOnline, the company’s on line trading division, was

clearly a principal driver of revenue growth in 2000.

‘‘Street’’ analysts expect ENE to generate about $54M of incremental net income

for the balance of the year 2001 versus the last nine months of 2000. However, the

‘‘street’’ also estimates only $20B of incremental revenue for the balance of 2001

versus 2000. In our opinion, ‘‘Street’’ analysts may not have grasped ENE’s business

model. By our estimate, ENE would have to increase revenue by $45B over the comparable period in 2000 to make consensus estimates. This would be $7B higher our

current estimated increase of $38B.

For 2002, ‘‘street’’ analysts expect ENE to generate incremental net income of

about $475M versus 2001. This is based on total revenue estimates of just $l26B,

which is only a $12B increase over current 2001 estimates of $112B. The ‘‘street’s’’

2002 projection is $60B under our revenue projections for 2002, but consensus EPS

estimates are much higher than ours. We estimate that ENE would have to increase

revenue by about $90B (based on 2001 analyst expectations for revenue of $112B)

76

to meet their EPS estimates. We expect Enron will miss this $215B of needed revenue by approximately $30B in 2002.

Actually, there arc few ‘‘street’’ revenue estimates for Enron. ‘‘Street’’ analysts

prefer to estimate operating profit, although it is not clear how they obtain their

results. The revenue estimates that do exist appear to be far too low, as we have

shown. Analysts have not understood to what extent trading would become the main

driver of Enron’s business. This may also lead them to miss evaluate the company.

If analysts understood that increased volume of trading was driving much of the

bottom line increase, they would need to think about the huge revenue increases

needed to meet their earnings targets. They would begin to realize, as we have

shown, that increased trading appears to result in lower margins. It has diminishing returns. Investors would then also see bow slim margins have become and

they would understand that if trading increases still more, which it will have to do

to increase profit, profit margins should become slimmer still. Such low margins

have important implications for the company’s balance sheet, its return on assets

and invested capital and, importantly, on its risk profile. We think an understanding of Enron’s business model would lead investors to award a much lower

multiple to Enron’s forecasted EPS.

Industry sources say that Enron traders make large directional bets, and that

they think that Enron is especially long gas and power. Enron’s portfolio of long and

short positions is ‘‘globally’’ balanced, that is to say that individual positions may

not be specifically offset with an opposite position. These sources say that this is

the main source of the risk, and that counterparty risk is not a major issue in general (though the PG&E receivable may be a problem, as we discuss). We note that

a $21B long position and a $20B short position in the Wholesale division sits on

top of total company equity of just $11B. Total assets are $65B. Hedge fund managers know that it is possible to lose money on both long and short positions at the

same time. Enron’s Wholesale portfolio is about 200 percent long and 200 percent

short and leverage is increasing. According to energy traders, some of these positions could experience swings of 25 percent of their value. Notional single position

sizes can be in the hundreds of million of dollars.

Very high revenue increases are largely generated by increased opportunities that

result from high prices and by very high volatility in energy markets. Although the

risk of less volatility, with the result that ENE would experience a significant decrease in its earnings, may now seem remote, the peak in volatility may occur this

summer. We doubt that volatility can increase after this summer, even in the West.

Industry observers predict high volatility to remain for a couple of years in the

West, until more supply comes on line. However, they expect volatility in other

parts of the country to decrease. Even this summer’s widely anticipated New York

energy crisis may not live up to expectations. It depends on the weather. But even

if New York’s energy market is volatile this summer, it should be temporary. Over

all, except in the West, volatility will probably decline, though New York may remain tight. Declining volatility is a major risk for Enron, as it reduces the opportunity for trading profits. We will discuss volatility and prices in detail.

There is also risk in doing longer duration deals to make up for lower trading

profit. Longer deals are more profitable because the total value of the discounted

cash flows is higher. However, as the duration gets longer the risk also increases.

The future cash flows become less predictable. As money managers know, a 30 year

bond is more volatile than a two year bond. The changes in the value of the securities held by Enron pose a risk to future earnings.

Because margins on Enron’s incremental business are so thin, and because it now

takes about $2.1B in additional revenues just to generate an additional penny of

after tax earnings, it probably should come as no surprise that Enron management

appears to have resorted to a variety of transactions that are of questionable quality

and sustainability to manage and to boost its earnings. These transactions appear

to be purposely obscured in Enron’s public reporting. They include related party

transactions whose total earnings impact is difficult to gauge, and they include gain

on sale items that are of questionable quality and where the buyer appears to have

recourse. In the past, when Enron management has been questioned about some of

these transactions, it has not been forthcoming.

By our estimate, about $0.41, or 28 percent, of EPS in 2000 came from gains on

sale of securitized assets, some or all of which may have recourse to Enron, and related party transactions. Gains on sale of securitized assets accounted for about

$0.33, or 22 percent of 2000 EPS, by our estimate. About $0.08 of the $0.33 appears

to be due to an unusual related party, called Whitewing, which we discuss below.

Other related party transactions accounted for another $0.08 of the $0.41, or 5 percent of EPS in 2000. The fact that many of the gains on sales transactions also appear to have recourse to Enron casts their quality into doubt. Enron’s balance sheet

77

reflects swaps that insure the buyer of these securitizations against some amount

of loss. We go into detail on these transactions below.

Finally, we come to the issue of ENE’s valuation. Some estimates of Enron’s value

seem simply arbitrary, while some others attempt to use a ‘‘market driven’’ price

to earnings multiple based on future earnings by segment. First, we can not agree

with ‘‘street’’ analyst EPS growth projections because we expect lower prices and

lower volatility. However, even if Enron were to generate the massive revenue increases required to hit EPS expectations, given the added risk from the balance

sheet and from decreased volatility, the very high so-called ‘‘market multiples’’ that

are being awarded to the business are inappropriate.

For example, one analyst estimates that the Wholesale group will produce about

82 percent of total year 2001 IBIT. He then extrapolates that Wholesale will earn

$1.48 of his $1.80 2001 estimate. The analyst applies an arbitrary 35x multiple to

those earnings, though even by his aggressive estimate they will grow at 20 percent

per year in 2002. He thus values Wholesale at $52 per share in 2001, which is still

only 58 percent of his total valuation of $90. He then adds Broadband, which is even

more arbitrarily valued at $30 in 2001 and $34 in 2002, even though it loses money.

This so-called analysis is typical of current ‘‘Street’’ thinking.

Goldman Sachs, by contrast, sells for just 16x 2001 estimated EPS, 16x 2002 EPS,

and 7.65x EBITDA. Few would argue that Enron has a business franchise equal to

Goldman. However, using Goldman as a yard stick, as we explain below, we estimate that ENE might be worth between 7.65x TTM EBTDA, or about 15x EPS.

That would put Enron’s total value between $23 and $30 per share. We also do a

separate segment analysis below. By this method, we estimate that the Wholesale

division might be worth $19.50 per share. Retail, pipeline, and Portland General

may be worth $9. We value Broadband at about $1.75. We deduct $3 for the cost

to operate these businesses at the corporate level. We arrive at a value of $27 per

share by this method.

Senator BOXER. Now this is not complicated to read this, and this

is a respected company. Do you recall ever having seen this, seen

excerpts of it, heard it discussed in any way by your colleagues or

others?

Mr. SKILLING. Senator, I do not recall specifically. I do not know

if they are respected analysts. I do not know, I’ll take your word

for it that they knew what they were doing, but—which may end

up being a mistake, but this is just absolute, absolutely, fundamentally incorrect.

Senator BOXER. What is incorrect?

Mr. SKILLING. The concept of declining margins. It is fundamentally incorrect.

Senator BOXER. So this analyst who predicted the demise of

Enron was incorrect?

Mr. SKILLING. No, this analyst said—and because—and this has

been something—and I do not know this specific firm, but there are

a number of firms that began to comment on a drop of margins in

the company. And the reason that they got that is when energy

prices quadrupled, natural gas and electricity prices quadrupled.

We do not own generating facilities, or own very few. We do not

own oil or gas production.

Senator BOXER. Sir. Mr. Skilling, I appreciate that you do not

agree with this. I’m not asking you that.

Mr. SKILLING. No, no, wait. Our margins——

Senator BOXER. You—no, no, no, sir. I have a reason——

Mr. SKILLING. I want—Senator, you have——

Senator BOXER. My question——

Mr. SKILLING [continuing]. Asked me a very——

Senator BOXER [continuing]. Had nothing to do with whether you

agree.

Mr. HILER. Senator, I’m sorry. With all due respect——

78

Senator BOXER. I simply asked if you recalled it.

Mr. HILER. He is trying to answer your question.

Mr. SKILLING. I’m trying to answer.

Senator BOXER. No, no, that was not my question. My question

simply was——

Mr. SKILLING. The question is this is absolutely in error. I

think——

Senator BOXER. But I did not ask you——

Mr. SKILLING [continuing]. The intent is to suggest that I have

some information from reading this that impacted my decision——

Senator BOXER. No, that was not——

Mr. SKILLING [continuing]. To sell stock.

Senator BOXER [continuing]. What I asked.

Mr. HILER. Senator, my—Senator, with all due respect, my——

Senator BOXER. Mr. Chairman, I’ve asked a simple question.

Senator DORGAN. Let us let Senator Boxer ask the question——

Senator BOXER. Let me ask it again. I never asked what you

thought of this. I asked if you had seen it, discussed it, heard it

discussed with your colleagues. That is all I want to know, not

whether you——

Mr. SKILLING. No, I do not recall specifically seeing this document. I have seen documents and analyst comments that similarly

raised an issue of declining margins which I fundamentally disagree with.

Senator BOXER. I respect that. Okay. Now are you aware that

the person who wrote this was demoted?

Mr. SKILLING. Demoted?

Senator BOXER. Yes, demoted in his company.

[Mr. Skilling shakes head].

Senator BOXER. Okay. Mr. Chairman, my time is up. Can I stay

for another round?

Senator DORGAN. Of course.

Senator BOXER. Thank you.

Senator DORGAN. Senator Nelson.

Senator NELSON. Thank you, Mr. Chairman.

Ms. Watkins, I have a series of questions that I’d like to get for

the record, so if I could address you.

Ms. WATKINS. Okay.

Senator NELSON. Could you specifically describe the difference

between the so-called off-the-books partnership and other Enron

partnerships that may have been publicly traded, of which we’re

told that they number several thousand?

Ms. WATKINS. Are you referring to the special purpose entities

that Enron routinely uses to fund certain assets?

Senator NELSON. I’m talking about a number of partnerships. In

some cases the on-the-books ones were the ones that were traded

on stock exchanges. And I wanted you to describe the difference between the off-the-books and the on-the-books partnerships, of which

we’ve been told there were about 3,000.

Ms. WATKINS. Well, there are—we had equity investments. Typically those were in public or private companies, not always partnerships, but those were in our merchant portfolio that we would

fair value, or write up to their fair market value.

79

As to the numbers in the press, about 3,000, you know, special

purpose entities, I’m not specifically aware. All I can speak to is

different transactions that I might have worked on. We might set

up as much as three or four for an international investment. And,

as I mentioned before, it was to give us all kinds of alternatives

if and when we ever wanted to sell that investment that we had

a company that a buyer would be—would find attractive, you know,

whether they wanted to buy a Cayman company or a U.S. company. So a lot of that was just—we did hire the best and the

brightest, and it was strategically planning how we bought assets.

Senator NELSON. Okay. There may be some semantics here, but

I’m particularly thinking about partnerships that were created

whereby they would be publicly traded on a stock exchange. You’re

familiar with those kind of partnerships?

Ms. WATKINS. No, sir, I’m not. That Enron held? No, not that

were publicly traded.

Senator NELSON. Well, let me ask you about in a partnership

that was publicly traded, was there an opportunity whereby Enron

would allow partners to buy additional interest in that partnership

as a way of supporting the partnership’s ability to distribute the

minimum quarterly dividends to its investors or limited partners?

Ms. WATKINS. I think you might be referring to some of the master limited partnerships that Enron had, I think, in the liquid pipeline area and possibly EOTTs, but I do not have any firsthand

knowledge of the way those partnerships worked.

Senator NELSON. Mr. Skilling, do you?

Mr. SKILLING. I’m really not familiar with the mechanics on the

master limited partnerships.

Senator NELSON. You’re not familiar with whether or not the

partnerships would allow limited partners or others to buy in instead of buying publicly-traded shares of those limited partnerships?

Mr. SKILLING. Senator, I just do not know what that means. Can

you say it again?

Senator NELSON. All right.

Mr. McMahon.

Mr. MCMAHON. And I’m afraid I’m going to have to be a little

bewildered, as well. The publicly traded partnerships that I’m

aware of that Enron somehow associated with are EOTT, which is

the master limited partnership, and Northern Border Pipeline.

There may be others, but I do not—none come to mind. In the

EOTT partnership, if I think I understand your question, there is

some sort of obligation in which Enron as the general partner has

an obligation to EOTT limited partners for dividend distributions.

I’m not precisely sure how all that works or how that obligation

manifests itself.

Senator NELSON. So I’m really seeking information here. In a

publicly traded partnership then that Enron could allow private

parties to buy into that partnership instead of through purchasing

on the public traded stock market. And if so, it was a way to support the partnership’s ability to distribute the minimum quarterly

dividends in that partnership?

Mr. MCMAHON. I’m not familiar with the first point, which if I’m

understanding your question, that somehow off-exchange purchases

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and sales can happen. I’m not familiar with that capability. But on

EOTT in particular, there is some sort of credit support that Enron

gave EOTT which would assist it, as I understand it, to make its

quarterly distribution from time to time.

The reason I know this is it occurred post bankruptcy when

EOTT tried to ask Enron to make good on that promise, and obviously post bankruptcy we were not able to. I’m afraid that is really

all I know about that.

Senator NELSON. Well, as we get on into this in further discussions, I’m given to believe that there were certain partnerships set

up that could meet their cash requirements by issuing additional

limited partner interest with the partnership. And that Enron

would contribute to that partnership in exchange for additional

partnership interest to support the partnership’s distribution of the

minimum quarterly distribution. And if that is the case, and that

is what I’m asking, there is absolutely no risk to someone investing

in that partnership, because then Enron will come in and support

it so that the partnership distribution is there, the minimum quarterly distribution is there.

So none of the three of you, save for your general knowledge, are

aware of this particular mechanism?

Ms. WATKINS. No, sir, I am not.

Senator NELSON. Okay. Let me ask you this, Mr. Skilling. Earlier

we had talked about—well, let me ask you. Enron Energy Services—that was a partnership. And was it consolidated on Enron’s

books?

Mr. SKILLING. Yes, sir.

Senator NELSON. Okay. Now earlier I had asked you if you had

any information about any information or communication being

transmitted from Enron, its officers, its directors, encouraging pension funds to acquire Enron stock, and you had indicted that no,

you did not have any information of that.

Mr. SKILLING. Well, I—no. I thought the question you were asking was, you know, sometimes when the stock was dropping. I

think you were saying that they were buying stock in October or

something, was there any communication. I was gone, so I would

not know.

There would—in the normal course of business we had an investor relations group. And I would imagine, you know, over the last

decade I’m sure that they probably have talked with most of the

large pension funds in the country and talked to them about Enron

as a potential investment candidate. But I, after I left on October

14, I would have no information about that. August—I’m sorry, August 14 of 2001. I would have no information.

Senator NELSON. All right. But before that you would have some

knowledge of those pension funds investing in Enron stock?

Mr. SKILLING. Well, not really. I mean there—we used to get a

printout, I do not know, once a quarter or once a half, that just

showed who the largest shareholders were in the company. I do

not—it would be the list of like the top 25 holders. And then I

would typically see that, but to be in the top 25 you had to own

a lot of stock. I mean the top 25 holders of Enron stock would—

I forget what the threshold is, but it was probably 10 million

shares, 5 or 10 million shares.

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Senator NELSON. Do you have any recollection back in 1998 that

you talked to the Ontario Teachers’ Pension Fund of getting them

to invest in EES?

Mr. SKILLING. I’m sorry, say again.

Senator NELSON. The Ontario Teachers’ Pension Plan.

Mr. SKILLING. Yes, sir.

Senator NELSON. Getting them to invest.

Mr. SKILLING. In—but I did not hear——

Senator NELSON. In EES, Enron Energy Services.

Mr. SKILLING. But what was the date, sir?

Senator NELSON. 1998.

Mr. SKILLING. I do not remember the specific meeting, but the

Ontario Teachers’ Pension Fund became—bought a portion of

Enron Energy Services. And I believe CalPERS bought a portion of

Enron Energy Services in late 19—would have said it was 1997,

but was it 1998?

Senator NELSON. January of 1998.

Mr. SKILLING. January of 1998, okay. All I can say is that I do

not recall specifics, specifically talking to them, but they were our

partner in EES. We sold, I think, 7 percent of the company, and

I think Ontario Teachers took, this is my recollection, like 3 percent. I think CalPERS took 4 percent of the business.

Senator NELSON. And what was your role in getting the Ontario

Teachers’ Pension Plan to invest?

Mr. SKILLING. I do not recall specifically. I would imagine that

for an investment like that they would have sent their representatives to Houston and asked what the business strategy was of the

business. And I do not know if I gave that presentation or if somebody else did, but we would typically give a presentation on what

the markets were that we were going after and how we were going

after those markets, and that sort of thing.

Senator NELSON. Okay.

Thank you, Mr. Chairman.

Senator DORGAN. Senator Hutchison.

Senator HUTCHISON. Thank you, Mr. Chairman.

Mr. McMahon, I am a lawyer, but I’m not a bankruptcy lawyer.

But after my last line of questioning a bankruptcy lawyer did call

my office and suggested that there are ways that a company in

bankruptcy can help severed employees. And that is by either hiring former employees back for a temporary period or listing some

of the severance costs as administrative expenses.

My question to you is would you talk to your bankruptcy lawyers

to see if you can do anything for the severed employees who have

lost so much? This would not affect their pensions, but many of

them would feel so much better if they at least had their contractual severance obligations met. Would you make that commitment

today?

Mr. MCMAHON. Absolutely, Senator. You have my personal commitment. This is a very high priority for existing management of

the company to deal with this. And I’m not an attorney, but I’m

becoming a bankruptcy expert unfortunately, and a lot of these

things we have pursued.

The administrative claim as an issue for pre-petition severed employees, as I understand that, that is a matter of getting that paVerDate 03-FEB-2003 08:49 Sep 29, 2005 Jkt 088896 PO 00000 Frm 00085 Fmt 6601 Sfmt 6601 D:\DOCS\88896.TXT SSC1 PsN: SSC1
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perwork done. Post-petition employees it is a little, as I understand, it is a little bit tougher matter because of the termination

of the severance plan. But we are actively researching everything

we can do for these employees and we’re going to be working with

the Creditors’ Committee on this, as well.

Senator HUTCHISON. I appreciate thus far your commitment to do

that. I think it is important. You have a certain amount of assets

left, and I would like to see a more favored treatment of people who

have been left in the lurch.

Second, if this bankruptcy lawyer is correct and people can be

temporarily rehired and then made to be administrative expenses

later, I would at least like to see the employee’s status the same

as attorney’s fees, for instance. And I think that would be some

small amount of help that might be given in these circumstances.

I would like also to ask you, Mr. McMahon, if the nature of the

business that is left of Enron, in that are there any other off balance sheet partnerships and is that an ongoing concern that we

should address?

Mr. MCMAHON. What is left of Enron we are having internally,

in connection also with our external counsel, Skadden, Arps &

Weil, Gotshal, exhaustive investigation of all the corporate structures that the company has. Most of these partnerships or finance

structures have creditors. So, as part of the bankruptcy, we are determining who they are, how it was structured, et cetera. And it

is my understanding that we are fairly far along in that process,

and to date have not discovered anything that would cause us concern, a lot of these other partnerships, but that is a process that

is still under investigation right now.

Senator HUTCHISON. Okay. Thank you, Mr. Chairman.

Senator DORGAN. Senator Hutchison, thank you.

Mr. Skilling, on January 22, 2001, the Enron Board of Directors

awarded you an additional 125,000 shares of stock roughly, at no

cost to you. Is that accurate?

Mr. SKILLING. Shares of stock or stock options?

Senator DORGAN. Stock options, I’m sorry. Options for shares of

stock.

Mr. SKILLING. I do not remember the exact number.

Senator DORGAN. The 125,562 shares, or options rather for

Enron stock, why would a Board do that in a January meeting?

Mr. SKILLING. Well, January was typically our compensation

meeting. What we would do is calculate how the business had done

for the prior year, and then based on that we would determine

what our overall bonus pool was and allocate that to our employees. So that occurred simultaneous with management.

Senator DORGAN. Now, when you were testifying before the

House of Representatives, you were asked if you dumped stock because you knew there was some financial trouble in the company.

And, I just pointed out that you sold $66 million worth of stock in

a period of time. You said, ‘‘No. In fact, when I left Enron holding

almost the same number of shares that I held at the beginning of

2001.’’ But, you did not tell the House of Representatives that, in

fact, during that period you received 125,000 shares, options for

shares of Enron. Is that true?

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Mr. SKILLING. The shares count that I gave is shares, not options. So those options——

Senator DORGAN. Yeah, but you were busy selling. You sold

500,000 shares for $15 million a month after you left Enron; you,

from January 3 to June 13, sold 10,000 shares every Wednesday

for a total of 240,000 shares. The point you were making to the

House was, ‘‘Look, I did not dump anything. In fact, I ended up

with about the same amount as I started with.’’

But, in fact, when you take a look at what was sold, you converted options to shares and sold them. It appears to me you did

not tell the whole truth to the House when you answered that

question.

Mr. SKILLING. Well, this is—I think that gets to Senator Boxer’s

question. I do not know how you want it presented. I mean the statistics are there; you have to file them with the SEC. You guys can

get them and present them however you want.

Mr. HILER. I would also just—I would like to point out for the

record, I believe that was in my client’s opening statement. And

what he was showing, I believe, was that he did hold shares——

Mr. SKILLING. At the end.

Mr. HILER [continuing]. Significant shares at the end, at the period when he left the company, and he had significant shares at the

beginning of the period.

Mr. SKILLING. I’ll give you an example, Senator.

Senator Boxer said that I sold 500,000 shares. There was a little

confusion there because there was a stock split that occurred in

1999. So her number was calculated different, you might have to

adjust for that. But I started the year 1999 with 262,000 shares

that I owned. I ended the year 1999 with 906,000 shares. So I actually had an increase of over 600,000 shares during that time period. Yes, some shares were sold during the period, but in terms

of share ownership, the share ownership increased. So I do not, you

know, you can present it a number of different ways. I do not

know—I mean I’ve presented it every way I can and you guys have

the statistics and you can——

Senator DORGAN. Well, and I think I represented what we have,

and it suggested something different than you’re now saying, but

let me ask about another report. I do not have any basis for knowing about this, I just ask you to respond to it. There was a report

in the Dow Jones news wires that you and Ken Lay stage-managed

a fake trading room to impress analysts, jokingly referring to it as

‘‘The Sting.’’ You wanted the room to look like a Wall Street trading floor, so you got the best equipment, tore down offices. You

would tell the analysts ‘‘This is how we structure a deal.’’

‘‘And we painted phones black to make it look like a slick operation. We held a rehearsal with Skilling and Lay the day before,

and Skilling said he wanted to play the Paul Newman character in

the movie ‘The Sting’ when the analysts came through. But they

said it really was more of an elaborate charade because there was

not much going on there.’’

How accurate is this?

Mr. SKILLING. Any suggestion that the trading floor in EES that

was developed was not for specific business purposes and did not

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significantly advance the conduct of the business is preposterous.

It is absolutely preposterous.

Senator DORGAN. Did you try to deceive analysts when they came

to that floor?

Mr. SKILLING. Absolutely not.

Senator DORGAN. Did you paint phones black and invite other

people to come sit at those desks——

Mr. SKILLING. I do not know how you paint phones black. We—

I mean we have standard telephones in the company. I’d imagine

they’re the same phones that we have everywhere else. If someone

painted a phone black, I certainly did not know about it. Was the

trading floor a legitimate effort to put together a better risk management and better business process? Absolutely.

Senator DORGAN. I understand that, but I was asking about a

circumstance they alleged you created in order for analysts to be

able to see something that did not actually exist in operation, but

I think you’ve answered that.

Let me ask you something on a chart that I had used previously.

This chart shows subsidiaries of major corporations. And it may be

hard for you to see, but I’ll describe what it is. It talks about the

rank in Fortune 500, the first 10 companies, 10 largest companies,

and over on the far right it says ‘‘Subsidiaries and Offshore Tax

Havens, Enron, 872.’’

The next largest company is General Motors. They had 14 subsidiaries and offshore tax havens; Enron, 872.

The reason I ask the question is, you know, some people think

that this was a culture in which you stretched the rules, bent the

rules, then broke the rules; and that part and parcel of all of this

is to be as aggressive as is possible to do a lot of things, including

avoiding paying taxes. How is it that the company would have 872

subsidiaries and offshore tax havens? Any response to that?

Mr. SKILLING. Senator, I do not know. If you look at the total

subsidiaries the company had, I’m guessing 3,000 subsidiaries.

Senator DORGAN. You had 2,832, far more than any other. The

biggest company, General Motors, had 316. But of interest to me

is how many of them were in tax havens, Cayman Islands and so

forth. I do not think I’ve ever seen anything quite like this, and it

reinforced for me, at least, that there was a culture here of——

Mr. SKILLING. Yeah, but—I’m sorry, I cannot see——

Senator DORGAN [continuing]. A lot of unusual——

Mr. SKILLING [continuing]. The chart from here. My eyes are not

as good as they used to be. Do you have any——

Senator DORGAN. Let me ask someone to come down there and

show it to you.

Mr. SKILLING. Do you have any banks on the list? Do you have

General Electric on the list?

Senator DORGAN. Those are the 10 largest corporations in the

country.

Mr. SKILLING. Then why is not General Electric on the list?

Senator DORGAN. Well——

Mr. SKILLING. Is this—okay. Let me see them, yeah.

Senator DORGAN. Yeah. You’ll see the list.

Mr. SKILLING. Okay.

85

Senator DORGAN. General Electric is on the list and they had 24

subsidiaries. But I’d like you to——

Mr. SKILLING. Now wait. Now, you know, I hate to be skeptical,

but——

Senator DORGAN. Well, in this room it is a common thing these

days.

Mr. SKILLING. Yeah.

Senator DORGAN. Especially today.

Mr. SKILLING. Certainly is. General Electric, GE Capital Corporation had multiple investments with us in subsidiaries. I would

imagine they had more investment subsidiaries in partnership with

Enron than 24. I mean what is this chart? Is this General Electric

Corporation, or have you picked up all of the subsidiaries? How can

you do business—General Electric does business in several hundred countries around the world. They would have to have a separate incorporated business in each——

Senator DORGAN. Yeah. Well, Mr. Skilling, this——

Mr. SKILLING [continuing]. One of those countries.

Senator DORGAN [continuing]. Is a report off their 10-Ks. But I,

you know, we can have another hearing on General Electric.

Mr. SKILLING. Well, I mean just think about it logically.

Senator DORGAN. I’m very interested in Enron at this point.

Mr. SKILLING. Just think about it.

Senator DORGAN. So if you could describe for me as the CEO of

Enron, former CEO of Enron, your subsidiaries, and especially

those subsidiaries in tax havens.

Mr. SKILLING. I guess all I can say is I would imagine that if you

got the accurate numbers there, I would imagine you would not see

as much difference between Enron and other companies. I do not

know what the specific purpose of each offshore subsidiary was, but

I know, for example, in every single country where we operated we

had to have a separate subsidiary. We had to have a separate subsidiary for every single project we entered into. And there is no

way that General Electric operates in fewer than 24 countries. I

mean it just—it does not make any sense.

Senator DORGAN. Well, we’ll have further dialog about that. I’ll

submit some questions to you.

Mr. McMahon, I just have two other questions, then we’ll finish.

Mr. McMahon, I know that the company offered bonuses to get

people to stay just prior to bankruptcy. And that also is controversial, especially because so many people lost so much money. I believe you were given a $1.5 million dollar retention bonus; is that

correct?

Mr. MCMAHON. That is correct.

Senator DORGAN. And was that common? How many people in

Enron just prior to bankruptcy got bonuses to convince them to

stay? And was a million-and-a-half necessary to convince you to

stay at Enron?

Mr. MCMAHON. Let me answer your first question first. I believe

the number of retention bonuses ranged into the hundreds of employees. I’m not precisely sure of the exact number. And at the

time, the Board authorized this; I was not part of this decision. But

frankly, it probably was not necessary for me to receive that

amount to stay.

86

Senator DORGAN. Ms. Watkins, did you receive a bonus to stay?

Ms. WATKINS. No, I did not.

Senator DORGAN. You understand why some people down at the

bottom would be furious with all this? I mean, there is a lot of

money flying around if you look at the history of this company in

recent years, a lot of money moving around quickly.

Mr. Skilling has said nothing about Mr. Fastow today really, but

if I were Mr. Skilling, I think knowing what I know—and I’ve read

a substantial amount about what happened here, I would think

that Mr. Fastow deceived people inside the corporation, or they

knew what he was doing and acquiesced to it, but one of the two.

But yet, I do not hear anybody talking about who did something

inside the corporation that was inappropriate, except the Board of

Directors.

The Board of Directors issues a best-case report that is scathing

about what happened inside this company. And now, you know, I’m

going to mention the bonuses. I’m sorry to do that, Mr. McMahon.

I know that no one has raised any questions about your role. You

say you went to see Mr. Skilling to complain about the circumstances in a very similar way that Ms. Watkins complained

and Mr. Skilling turns that discussion into a discussion about compensation whenever we raise this issue. I assume it was more than

compensation, it was what you said it was.

But Mr. Skilling says Ms. Watkins is wrong, Mr. McMahon is

wrong, the Powers Report is wrong, the market is wrong. You

know, Mr. Skilling, I have great difficulty believing your testimony.

I wish I could believe your testimony, but somebody was not home

at the Enron Corporation.

Mr. SKILLING. Is that a question?

Senator DORGAN. Well, no, it was a statement. I regret having

to make the statement, but you’re sure welcome to respond to it if

you like. I can put it in the form of a question if you’d prefer.

Mr. SKILLING. I think if you’re suggesting that—well, let me start

off. I do not think that my description of the meeting is radically

different than Jeff’s.

Senator DORGAN. It is.

Mr. SKILLING. Everybody has a meeting. It is not. I have said

that Jeff raised the issue of conflicts of interest. I did not say it was

strictly a compensation issue, he raised an issue of conflicts. We

had a process in place that was approved by the Board and he was

raising some other issues. My recollection—and, you know, Jeff

probably has a better recollection because he probably thought

about it more than I did in retrospect. But my recollection is that

compensation was a key part of that discussion. And I believe that

I followed up and I believe that I—I hope that I put his mind at

ease that he should do what he believed was ethically correct, because I believe in that. I have heard——

Senator DORGAN. See, you’ve done it again, Mr. Skilling.

Senator DORGAN. You just created a transition into a new subject.

Mr. SKILLING. I have heard Ms. Watkins’ comments, and I cannot

for the life of me see what basis she would have for suggesting that

I would know some of that. I mean, how would she know that? And

I do not see that it is at all inconsistent that there would be some

87

things I do not know if some people purposely kept me from knowing some things, which I guess goes to the beginning of your comment. I do not see why that is so hard to understand.

Senator DORGAN. Well, I would say this. I’m not a stockholder

and I’m not an employee, but if I were and somebody at the top

was getting $66 million selling shares of stock, I’d surely want

them know everything that is going on inside that company. Especially when key people, including Vice Presidents, say what was

happening was common knowledge, and especially when after the

Board of Directors issues a report that says what was going on inside that corporation was, ‘‘appalling.’’ I think there is an expectation that people in that position would have known.

Mr. SKILLING. You now say that you did not know. I regret very

much that testimony, because I think it is at odds with what Mr.

McMahon said, despite the fact that you pivot that every time you

talk about it. It is at odds with Ms. Watkins, it is at odds with the

market assessment of that company, and it is at odds with the

Powers Report.

Mr. Fitzgerald.

Senator FITZGERALD. Thank you, Mr. Chairman.

Ms. Watkins, I have not had a chance to ask you any questions

today. As I’m sure you know, I have great admiration for your role

in bringing to the attention of superiors what you thought were

grievous errors in the way Enron was accounting for earnings and

hiding losses. And I think the whole country has a great deal of

admiration for you, because it took a lot of courage to stand up and

speak out when you did.

And everything that I’ve heard you say, both before this Committee and the House, has made perfect sense to me. The only

thing I’m troubled with is the notion that Mr. Ken Lay was somehow duped. And I want to ask you a few questions and go back

over why it is that you think that Mr. Lay was duped. You gave

him your letter shortly after Mr. Skilling left the firm. He left the

firm on August 14, 2001. What day did you give him your letter?

Ms. WATKINS. I gave him the anonymous letter on August 15,

2001, and then the full set of memos when we met on August 22,

2001.

Senator FITZGERALD. And you had the meeting for a half hour on

August 22?

Ms. WATKINS. Yes.

Senator FITZGERALD. And at that time, you recommended to

him—and in your memo you clearly recommended to him that they

should conduct an investigation; that the investigation should be

handled by a law firm different than Vinson & Elkins because they

were clearly conflicted. They were at the center of setting up all

these partnerships. Is that correct?

Ms. WATKINS. Yes.

Senator FITZGERALD. And did you also not recommend to Mr. Lay

that they review the propriety of the accounting for all the transactions?

Ms. WATKINS. Yes. At the heart of my concern was an accounting

concern.

Senator FITZGERALD. It was an accounting concern. Now when

Mr. Lay ordered the investigation though, is not it correct that he

88

told Vinson & Elkins to do the investigation? He hired them to do

the investigation and that he specifically told them not to review

the accounting issues that you raised.

Ms. WATKINS. Well, I learned with the release of documents that

the House did a couple weeks ago that Vinson & Elkins’ investigation had been limited and they had been told to not second-guess

the accounting treatment. They did not indicate that they had any

limits in their review when they met with me in September.

They also met with me October 16, 2001, in the afternoon. We had released earnings that morning. We had written off $1.2 billion

in shareholders’ equity. They told me that—they did not show me

their report, but they said that the conclusion had been that the

accounting, when done, was proper. So they made accounting conclusions to me. It seems at odds with the fact that they say that

they were not second-guessing the accounting. It all appears to be

somewhat of a whitewashed report to me.

The reason I think Mr. Lay did not get it was he gets this report

from V&E October 15th saying ‘‘It’s all okay, the optics are bad.’’

And he just decided ‘‘Let’s unwind it. Let’s write it off, let’s get it

behind us.’’ If he truly understood the magnitude of manipulating

your financial statements I think, you know, if it were me, I’d do

a lot more contingency plans. I would know that that would upset

the market, what would be our backup on equity and debt finance,

what were we going to tell our investors, what were we going to

tell our customers.

We were radio silent for roughly two weeks and we hid behind

the SEC inquiry. When investors would call and say ‘‘What’s this

about the unwind? What’s this about Raptor?’’ The response was

always, ‘‘Well, the SEC is investigating, so we’re not going to be

able to answer questions about Raptor.’’ My understanding is the

SEC phoned us and said ‘‘Do not hide behind us. If your investors

have questions,’’ you know, ‘‘answer them.’’ We had no ready answer to explain that write-off, which makes me think he did not get

it.

Senator FITZGERALD. But, Ms. Watkins, is not it true that Mr.

Lay specifically instructed Vinson & Elkins, ‘‘Do not follow Ms.

Watkins’ recommendation and review the accounting propriety. Do

not review the accounting.’’ On page 176 of the Powers Report it

says that ‘‘The result of the Vinson & Elkins review was largely

predetermined by the scope and nature of the investigation and the

process employed.’’

Isn’t it possible that Mr. Lay was contributing to burying your

concerns by putting in the restriction that they not review the propriety of the accounting?

Ms. WATKINS. That restriction should not have been there, in my

opinion, and it concerns me that it was.

Senator FITZGERALD. It concerns you that it was? I mean it is

like you have raised accounting issues; and it would be like somebody having some trouble with their car and taking it to the dealer

and say ‘‘Please fix the car, but do not look under the hood.’’ It is

a real problem.

And certainly if he had been duped prior to your meeting with

him on August 22, do not you think you de-duped him in that

meeting?

89

Ms. WATKINS. I would think so. I mentioned in my opening statement that I had been extremely disappointed by the company’s reaction and response to my concerns. And I was incredibly frustrated, because I do think Mr. Lay missed a small window of opportunity to salvage the company by ignoring the obvious, as indicated

in the Powers Report.

Senator FITZGERALD. And Mr. Lay is a bright man, is he not? Do

you have an opinion on that? Do you think he is a bright man?

Maybe you do not.

Ms. WATKINS. Not after this fall.

Senator FITZGERALD. Did you hear Mr. Skilling’s discussion

about his description of the budget process at Enron? Is it your understanding that Mr. Lay and Mr. Skilling would meet with the

various units to discuss their budgets?

Ms. WATKINS. Yes. There was an annual budget process that occurred in the—typically in the fall of each year for the following

year.

Senator FITZGERALD. Was it your impression that units felt some

pressure to meet their budgets and contribute to Enron’s overall

earnings as they had been expected at the beginning of the year?

Ms. WATKINS. Yes. In fact, you know, Mr. Skilling referred to two

alternatives by which we accounted for our equity, merchant equity

investments, that we could hedge them with a local relation hedge,

or we could choose to hedge them with Raptor. Well, we also had

a third alternative, which was to take normal prudence reserves.

In many of those investments, Avici, I think, Enron invested maybe

as little as $5 to $10 million. The company went public, it—the

value rose up into the $170-$180 million range. We took all of that

into earnings at Enron Broadband when we had hold restrictions.

The prudent thing to do was to put a prudency reserve and maybe

just take 30 or 40 percent of that gain.

Senator FITZGERALD. Did Mr. Lay and Mr. Skilling ever tell units

to be prudent in their earnings and not to push the envelope?

Ms. WATKINS. I think the business units were under pressure to

meet their earnings targets. So if that was a mechanism by which

they could meet it, they would choose to write up their equity investments to the maximum amount. And then we were forced to

turn to something like a Raptor vehicle to lock in that value, and

that Raptor vehicle was not a real, true economic transfer of risk.

Senator FITZGERALD. Mr. Chairman, I know my time is expired,

but I wonder what the—I certainly have many more questions and

I do not want to hold up the other Senators. Do we want to do another round, or——

Senator DORGAN. Why do not we proceed to Senator Boxer.

Senator FITZGERALD. Okay. Thank you.

We’ll come back. Thank you.

Senator BOXER. Thank you. Mr. Chairman, we all know that we

are not prosecutors here; we’re not a court. Yet, we know that it

is illegal to sell shares based on insider information. It is not for

us to decide whether that happened. However, I want to get back

to this just to give my own opinion, as it ought to be examined.

You know, you can talk about number of shares from night to

morning. I used to be a stockbroker. We know if there is a threefor-one split, you start out with a share, you wind up with three.

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You can sell two and still have the one and say ‘‘I still have as

many shares.’’

I think the important thing is what the Chairman said. Mr.

Skilling, you and others sold multi-million—almost a billion dollars

worth of insider stock. The fact of the matter is that you sold $20

million worth before you told those employees sitting in that room

who looked up to you in more ways than one, to put their money

into Enron.

They looked up to you, they looked up to Ms. Olson. And it was

like a pep rally—you had already sold. You should have told them

that. And you should have, if you felt any fiduciary responsibility

when they asked, said, you know, ‘‘Look into diversifying.’’ You

mentioned that today in an offhand fashion, but that is not what

we heard.

I want to get to the California case. During the electricity crisis

on Front Line in June 2001, they asked you ‘‘What do you,’’ you

know, ‘‘the generators seem to be making so much money.’’ And,

you said, ‘‘We’re the good guys. We’re on the side of the angels.’’

That was in June, 2001. In that same month, you made your nowfamous joke referring to the Titanic, when the Titanic went down,

the lights were on.

Today, you give this very good excuse for this horrible statement

here to the California Attorney General with whom you were so

upset. You could have taken him on in a dignified way. I think it

is a little kindergarten for a person in your position to say ‘‘Well,

I’m going to tell a joke against all the people in California because

your Attorney General told a bad joke about Kenneth Lay.’’ I’m

sorry, I do not buy it. This is——

Mr. SKILLING. You think the Attorney General’s comment was a

joke?

Senator BOXER. I did not agree with his statement that he made.

Mr. SKILLING. Thank you.

Senator BOXER. That is not the point, and it is not the point to

change the subject. You took on the State of California when you,

in talking to the press, described the company’s condition, which

was going down. You said that Enron faced terrible problems because California’s electricity crisis had been solved. That is a direct

quote from The San Diego Union Tribune.

And in the SEC filing in November 2001, at the height of the

money coming into your corporation to keep it alive while insiders

were selling like mad, the SEC filing from Enron’s words, ‘‘The

power and gas intermediation business both benefited from price

volatility in 2001.’’ So we see what California meant to you. California was keeping——

Mr. SKILLING. Can I respond to that? Those are not inconsistent

comments.

Senator BOXER. I will let you respond, of course, as soon as I finish what I’m saying.

Mr. SKILLING. Keep the——

Senator BOXER. I will stop and let you say as many things as

my——

Mr. SKILLING. Thank you.

Senator BOXER [continuing]. Chairman thinks is appropriate.

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The fact of the matter is, Mr. Skilling, you told our state in 1994,

California would save billions of dollars by deregulation. You even

put a number on it, Mr. Skilling, $8.9 billion per year. But, that

did not happen. Let us see what happened. Okay? Let us see what

happened. We went from 1999, $7.4 billion total to keep our lights on and

keep our seniors cool in the summer and warm in the winter, and

our agriculture business going, and Silicon Valley going. If it were

a country, California would be the fifth largest country in the

world. Manipulation of a company and an industry is just wrong,

because it hurts the whole country. Electricity costs went up $27.1

billion in one year. By the way, demand up 4 percent. Demand up

4 percent. However, you said we were going to save over $8 billion a year.

Well, the overcharges are way more than that, and the long-term

contracts were a ripoff also. So it is many more billions that we

lost, this transfer of wealth from the people of my state to the robber barons of the 21st century. That is what I think. So the bottom

line is we paid a huge amount, and the electricity cost was not related to demand.

Now I want to go to FERC for a minute, because FERC was the

only thing between you and total deregulation. What did you do?

You wined and dined a lot of people at FERC, did you not? We

have here the list of the best recollections of FERC people, decision-makers.

On December 7, 2000, you treated these folks or had lunch with

these folks and with this Daniel Larcamp, Director of Markets,

Tariffs and Rates at FERC, along with seven other FERC employees. He says ‘‘Several other Enron employees participating in showing Enron’s trading room.’’ So was that in Texas that that occurred?

Mr. SKILLING. I have no idea, Senator.

Senator BOXER. Well, he said he had lunch—you were present at

the lunch in Enron’s trading room. Would that be in Texas if this

gentleman is correct, his calendar is correct?

Mr. SKILLING. Well, we have a number of different trading floors,

but I just do not recall that. We had a lot of people from government that would come through, because this was all new and people were trying to understand it. So I would not be at all

surprised——

Senator BOXER. Do you remember your lunch with Thomas

Herlihy on December 7, 2000, Executive Director and Chief Financial Officer of FERC?

Mr. SKILLING. Who? There is a——

Senator BOXER. H-E-R-L-I-H-Y. Do you remember anything like

that?

Mr. SKILLING. No, I’m sorry, I do not.

Senator BOXER. Do you know this Daniel Larcamp? Do you remember who he is?

Mr. SKILLING. No.

Senator BOXER. Had lunch with him. Okay. Well, Mr. Chairman,

I will submit some more questions for the record regarding this series of meetings that Mr. Skilling does not remember.

Mr. SKILLING. Have you gone through——

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Senator BOXER. Do you remember any other meetings with

FERC employees or decision-makers at all during the time when

Californians were asking FERC to intervene? Do you remember

any other meetings?

Mr. SKILLING. While California’s——

Senator BOXER. Yeah.

Mr. SKILLING. No, I had——

Senator BOXER. The last six months you were——

Mr. SKILLING. I had meetings with FERC commissioners, but I

do not remember in the last six months that I was with the company that I met with FERC commissioners.

Senator BOXER. Okay. I have one last question and then I am

done. You will be very happy to know that.

Mr. SKILLING. You have not asked any questions yet.

Senator BOXER. Well, I will. I said I’m done with my part.

Mr. SKILLING. Oh, Okay.

Senator BOXER. I’m making some statements. I just asked you a

question. You just answered that you did not recall.

Now I want to talk to you about overbooking lines. These are two

traders, T-R-A-D-E-R-S. Here is what they say: ‘‘What we did was

overbook the transmission line we had the rights on and said to

California utilities, ‘If you want to use the line, pay us.’ By the

time they agreed to meet our price, rolling blackouts had already

hit California and the price for electricity went through the roof.’’

Another one said: ‘‘We would overbook the lines, which would

cause congestion. The price of power would go up on the other end

and—where the power was being delivered to.’’

Do you have any knowledge that this was happening?

Mr. SKILLING. What is the——

Senator BOXER. By Enron traders.

Mr. SKILLING [continuing]. Reference to?

Senator BOXER. It is about the transmission lines in California

being overbooked by Enron.

Mr. SKILLING. Is this the result of the ISO [independent operating system] loading testimony that was held in, I believe—I think

it was the spring of——

Senator BOXER. Well, let me explain. I’ll explain what it is, because it is in an article here. The trader said: ‘‘Enron held the

transmission rights on path 26, a key transmission line connecting

Northern California to Central California, and also connecting to

path 15, a major bottleneck grid pathway in Northern California

owned by PG&E, which no one broke as a result of all of this.’’

So my question is are you aware that the traders were, in fact,

overbooking the line and congesting these transmission lines? Were

you aware of that at all?

Mr. SKILLING. The only thing that I’m aware of, Senator, is there

was a difference of opinion on the rules of the independent system

operator. It was just set up. Well, you know better than I do when

the independent system operator came into effect. But there was a

question as to how you could schedule and nominate power onto

the system. And it turns out the way it works, it is like, you know,

in the New York Mercantile Exchange. In the New York Mercantile

Exchange, in a typical day probably 200 to 300 BCF of gas is traded. The settlement location for that is Henry Hubb.

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You can only move 300 million cubic feet, so you’re trading something on the order of 700 times the amount of volume that can

physically be moved through a delivery point. So there would be

many cases where you would schedule, nominate capacity, in anticipation of an offsetting nomination that was going to be coming

later. That is absolutely standard industry practice. And the ISO

looked into one specific case. They said that their—it is my recollection of what they said, is the rules were not quite clear.

Senator BOXER. Okay.

Mr. SKILLING. And they ended up, I think we resolved it, said

that we would change the rules.

Senator BOXER. Well, Mr. Chairman, I just want to say that,

again, it is changing the subject. We have traders here from Enron

who are saying they did something wrong, but you do not see anything wrong. And if I could just close and leave.

There was a whole advertising campaign against Governor Gray

Davis. The ads were sponsored by an organization called American

Taxpayers’ Alliance. The Governor Gray Davis Committee has had

to file a suit because the people behind these ads will not come forward. Do you know anything about those ads that blamed the Governor for the grayouts it was called?

Mr. SKILLING. No, I do not, Senator.

Senator Boxer: You do not know anything and you never talked

to anyone who contributed to that fund and——

Mr. SKILLING. I——

Senator BOXER. We’re going to find out eventually.

Mr. SKILLING. I do not know.

Senator BOXER. But you do not know that Enron contributed or

any of your traders, like——

Mr. SKILLING. I do not know.

Senator BOXER. Dynegy or—you never—you did not know about

this ad campaign?

Mr. SKILLING. I knew there were all sorts of ad campaigns going

on in California.

Senator BOXER. Did you know about that one?

Mr. SKILLING. What is it called again?

Senator BOXER. It was called out ‘‘Grayouts from Gray Davis.’’

They began June 18, 2001, before you left.

Mr. SKILLING. I do not recall, Senator.

Senator BOXER. Okay. Thank you very much.

Senator DORGAN. Senator Nelson.

Senator NELSON. Senator Boxer, do you need some more time?

Senator BOXER. No.

Senator NELSON. You’re certainly welcome to mine.

Senator BOXER. I think I did what I had to do.

Senator NELSON. Mr. McMahon, let me pick up where we left off.

You were describing the master limited partnerships, and you specifically mentioned EOTT. Are you aware of any other master limited partnership?

Mr. MCMAHON. The only other one I’m—that I’m aware of is

Northern Border Pipeline. And I’m not 100 percent certain that

that actually is a master limited partnership.

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Senator NELSON. Well, in your opinion, can you explain to the

Committee a description of how a master limited partnership is

structured?

Mr. MCMAHON. I really cannot with any degree of accuracy. I’m

just vaguely familiar with EOTT as it came across my area of responsibility over the last month or so when EOTT’s management

asked Enron to perform under a credit support agreement.

Senator NELSON. Mr. Skilling, can you provide to the Committee

a description of how a master limited partnership is structured?

Mr. SKILLING. I’m sorry, Senator, I cannot. I think it’s a tax

structure and they’re pretty complicated. I do not know.

Senator NELSON. Okay.

Ms. Watkins, we were trying to get the specific label on this

when we were talking earlier. Do you have any information you

can share with the Committee?

Ms. WATKINS. No, I do not. I’m not familiar with how master limited partnerships work.

Senator NELSON. Okay. Let me ask Mr. Skilling. We were talking earlier about CalPERS and Ontario and how in 1997 and early

1998 there was a successful involvement of getting CalPERS and

Ontario Teachers’ Pension Plan to invest in EES. We had talked

about that. Now, at the same time, you had a financial stake in

EES, did you not?

Mr. SKILLING. I do not know. I did not have a—well, I had a—

we had something that was called phantom equity, which was—you

could—when we started new businesses back in the early 1990s we

tended to give a piece of the business to the executives. We started

EES, I believe in 1994, and I was given a piece of phantom equity

in that. We converted that to—we did away with the plan and converted everybody onto standard Enron stock and options, and I do

not recall the specific date of that conversion.

Senator NELSON. Well, what begs the question is—and we’re

looking at this from a standpoint of legislation—is it a conflict of

interest for an officer of a company that has an interest in an entity of that company to go out and to get others to purchase into that

company in which the officer has an interest?

Mr. SKILLING. Well, you know, it was standard and is standard

industry practice. For example, in the development business, when

you’re developing a power plant, typically you give the developers

a percentage of the power plant. And then they’re out finding additional investors because you typically only want to keep a small

sliver. So that would be a standard industry practice, Senator.

Senator NELSON. Do you think that needs to be changed?

Mr. SKILLING. I, quite frankly, have not really thought about it.

I’ll think about it and—I do not think it is a problem. I do not

know, I’d have to think about it.

Senator NELSON. Well, you know, we live in a different world

then, because I can guarantee you if any of the Members of this

Committee were trying to get people to buy into something that

they had an interest in there would be people questioning the conflict of interest. I think that is something we’re going to have to

look into, Mr. Chairman, from the standpoint of the protection of

consumers.

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Mr. SKILLING. No, but I think if the issue is one of disclosure,

I mean my experience has been—and when we would bring in outside private equity to participate with us, typically they would insist that management have some sort of an equity interest in the

company. They would insist on that, so that they had some sort of

an incentive. That was the last plan, to my recollection, where we

had that.

And, in fact, we had looked at a number of other businesses

where—in fact, Mr. McMahon was involved in a business where we

were trying to bring in some outside equity and the outside equity

parties demanded that management have a percentage of the business. And I ended up personally terminating the discussions or telling them we’re not going to do the deal, because I said, ‘‘We will

not put our employees in a position where they’re not working for

Enron Corporation.’’

So, I think typically it is the private equity partners that like it.

I think from Enron’s standpoint, it is a good way to incent people.

So I think it is probably a little different, but I’ll think about it

and——

Senator NELSON. Did you have any other financial interest in

any other entity in the company?

Mr. SKILLING. When I started with Enron in 1990, I was given

a partial—or one of these phantom percentages in the wholesale

market, when we started that wholesale market. And then I converted that. In fact, I believe the conversion of that plan was at my

insistence also into just standard Enron stock and options, I believe

in 1994 or 1995, something like that.

Senator NELSON. Would you provide a list to the Committee of

the entities in Enron that you had a financial interest in?

Mr. SKILLING. It is just those two.

Senator NELSON. So state those two then again please for me for

the record.

Mr. SKILLING. It is what we called Enron Gas Services, which

later became Enron Capital & Trade; the name changed. And the

other one was Enron Energy Services. They were both kind of

standard phantom plans.

Senator NELSON. Would those entities include private partnerships as well?

Mr. SKILLING. Those were—well, Enron North America, our merchant business, was 100 percent owned by Enron Corporation. We

never sold an interest in that business to anyone. Enron Energy

Services we sold 7 percent to CalPERS and Ontario Teachers. Then

we ended up buying that back, I believe a year later, at what

turned out to be, I think, a very good investment for CalPERS and

for Ontario Teachers. I think—I mean the business was great for

them. It was a good investment on their part.

Senator NELSON. I’m sure it was.

Mr. SKILLING. ‘‘We’’ meaning Enron bought them out.

Senator NELSON. I’m sure it was, but my question was were you

involved in any of those private partnerships? Did that include

your investments in those two entities? Did that include any private partnerships was the question.

Mr. SKILLING. I do not—Senator, I do not think so. I do not

know. Enron North America, or Enron Gas Services was a 100 perVerDate 03-FEB-2003 08:49 Sep 29, 2005 Jkt 088896 PO 00000 Frm 00099 Fmt 6601 Sfmt 6601 D:\DOCS\88896.TXT SSC1 PsN: SSC1
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cent-owned subsidiary. And Enron Energy Services was 100 percent-owned, except for that piece that was sold to CalPERS and

Ontario. And we bought it back, I think after—do you remember

if it was a year? It was a relatively short period of time.

Senator NELSON. Thank you, Mr. Chairman.

Senator DORGAN. It is my intention to recognize Senator Fitzgerald for 10 minutes. I will follow that by 5 minutes, and we will

then adjourn the hearing. You have been with us for 5 hours and

have been very patient.

Senator Fitzgerald.

Senator FITZGERALD. Thank you.

Mr. Skilling, I wanted to return to the transaction with the

Braveheart Partnership again. That was a situation in which

Enron had a video business, a broadband video business. It entered

some kind of an agreement with Blockbuster. Blockbuster was

going to provide video content, movies, and Enron was going to

beam the movies to people’s homes via their broadband video network. And that business was a fairly new business. My understanding is it just existed, at its height maybe had 1,000 customers. Is that your recollection?

Mr. SKILLING. I do not know what the final number was. We

were in a beta test in Portland, Oregon; Salt Lake City; New York

City; and one other city, I forget which. But, at that point it was

a beta test.

Senator FITZGERALD. And that was the point in time in which

Enron sold that business?

Mr. SKILLING. Sold a portion of the business.

Senator FITZGERALD. Just a portion of the business?

Mr. SKILLING. Yes.

Senator FITZGERALD. What portion of the business did you sell?

Mr. SKILLING. I think it was—I cannot tell you exactly, but I

think it was the first 10 years of—it was a share in the first 10

years of cash-flow in the business, something like that.

Senator FITZGERALD. Okay. And you were not sure who it was

sold to? You did not know who it was sold to. You said that before.

Mr. SKILLING. No. No, I knew the name of it was Project

Braveheart, was internally what the project name was. I do not

know who the counterparty, the specific counterparty was in the

transaction.

Senator FITZGERALD. Now my understanding based on newspaper accounts—and I do not have the original documents—is that

the Braveheart partnership was created to receive, I guess that 10

years of earnings or revenues on that Blockbuster video business.

And that partnership went out and found an investor in Wood

Grundy, the investment banking arm of the Canadian Imperial

Bank of Commerce.

And my understanding is that Canadian Imperial Bank of Commerce, Wood Grundy, was going to take the earnings of that business, maybe it was for the next 10 years, in return for supplying

the partnership with $115 million. My understanding is also that

Enron promised to guarantee that Wood Grundy would get back

the $115 million that it put into the deal. If for some reason the

video business did not pan out, Enron would insure that the bank

in Canada would get its money back. Is that your recollection?

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Mr. SKILLING. I do not know the specifics of the transaction, Senator. I mean, I would have known that there was a sale. I mean,

you know, you’ll pick up—it is a big company, but I knew that we

were in the process of selling a portion of what we called our content services business, which is what you’re describing. And I believe we ended up selling. I do not know the specific nature of the

transaction, the specific terms and conditions, or the pricing of it.

Senator FITZGERALD. We discussed earlier that Braveheart paid $110 million to Enron, which Enron booked into earnings over two

quarters, $54 million in the fourth quarter of 2000 and $54 million

in the first quarter of 2001. Do you recall that?

Mr. SKILLING. I’ve read the newspaper account, so, yes.

Senator FITZGERALD. But you do not recall when you were at Enron booking $54 million in earnings from that during your first

quarter as CEO of the company?

Mr. SKILLING. Yeah. If you’d asked me, I would not have remember the number, but I have subsequently read in the papers what

the number is.

Senator FITZGERALD. Now that business that you sold 10 years worth of the revenues from, was that worth $110 million? It did not

really have any paying clients, did it, at that point? Did it have any

paying clients?

Mr. SKILLING. I—we were in beta test, so I do not know offhand.

Was it worth that much money? Yeah. I mean if you look at the

enthusiasm that there was for broadband applications at that time.

We had the only working online, effective video on demand platform in the country. And video on demand was a very exciting concept.

It is a very exciting concept where it is like a simulated VCR,

where you can buy a movie from Blockbuster or from a studio, you

can stop it, you can fast forward it, you can return it, rewind it,

but you do not have to return it to the store. I mean, all you do

is you just call it up on your screen. We had a whole list of movies.

You could pick which movie you wanted. When you picked that

movie, it stayed in a server close to your home for 3 days, and at

the end of the 3 days, it would be taken back. So it was very, in

my opinion, and I think most people in the industry, this very

powerful——

Senator FITZGERALD. So you thought it was reasonable to take into earnings $110 million based on the sale of 10 years worth of

revenues?

Mr. SKILLING. Yeah. Selling a piece of that business right then,

I think I—my guess is——

Senator FITZGERALD. Thought that was reasonable, yes or no?

Mr. HILER. Excuse me. Let me just make sure you answer the

question. I think he is already answered that he did not know the

figure that was——

Mr. SKILLING. Right, the specific——

Mr. HILER [continuing]. Taken in earnings. He answered you.

Mr. SKILLING. Was—I do not know the specifics of the transaction. Was there a tremendous hunger on the part of investors for

access to investment vehicles in video——

Senator FITZGERALD. Okay.

Mr. SKILLING [continuing]. Absolutely.

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Senator FITZGERALD. Were you aware that Enron Corporation

had made some kind of a promise to pay the Canadian bank back

if that business did not earn back the bank’s investment?

Mr. SKILLING. No, I did not know that.

Senator FITZGERALD. You were not aware of that. So somehow

the corporation gave some kind of a guarantee, something akin to

a guarantee, and you as a CEO were not aware of that. Somebody

could guarantee a $115 million debt without the CEO knowing?

Mr. SKILLING. Yeah. I would imagine that the approval authority

for a credit guarantee would be lower than for a cancellation. I just

do not know. I do not recall, Senator.

Senator FITZGERALD. It was a pretty good way to create earnings

though, is it not, if you can effectively have a partnership borrow

money. Enron can guarantee it so that the partnership can borrow

all the money it would like, and then pay it to you and you’d just

report that borrowed money as income. Does that make sense to

you, Mr. Skilling?

Mr. SKILLING. You would have to talk to the accountants about

that. I mean I, if the accountant said, you know, and I’m sure——

Senator FITZGERALD. This is not an accounting issue. This is a

valuation issue. I’m not questioning the accounting. I think the accounting may have been 100 percent according to——

Mr. SKILLING. Right. If you’re saying was it worth something,

asolutely.

Senator FITZGERALD. This is a valuation issue, not an accounting

issue. I want to——

Mr. SKILLING. The valuation of the partnership interest, I mean

at this time, this—people were so enthusiastic about this.

Senator FITZGERALD. Well, how did Enron get $110 million? Why not $50 million? Not what—why not $500 million? How did they

pick the $110 million value?

Mr. SKILLING. I do not know, but I would guess that they were

looking—my guess would be they were looking at comparable technology companies at that stage of development to see what they

were selling for.

Senator FITZGERALD. As CEO, did you want any procedures in

place to insure that Enron got fair value for assets that it sold?

Mr. SKILLING. We had lots of procedures in place. We had a

group that was called a risk assessment and control group that

would have done absolute strip-down of that transaction to see if

we were getting fair value for it. That would be standard operating

practice inside the company.

Senator FITZGERALD. Now it turns out in that case you got more

than fair value; is that not right? Because ultimately, that business

fell apart completely and wound up being worthless; is that not correct? And that was before you departed the company.

Mr. SKILLING. Well, in retrospect, I think it turns out that we all,

not just me, but I think several million people significantly overestimated the opportunities available in the broadband business

and the electronic delivery business.

What the problem was, I mean the problem turned out to be the

last mile. We could not get enough direct access over the last mile.

We had enough backbone to provide the video on demand. We had

plenty of backbone and capacity and fiber to get the movies out to

99

the extremities of the network, but we could not get through the

last mile.

Senator FITZGERALD. Mr. Skilling, it is not just that video business that you sold to partnerships. You sold lots of other Enron assets to partnerships and were paid lots of money for it, and in

many of the cases it appears that Enron—or the partnerships had

borrowed the money to pay Enron for those assets and that Enron

had either guaranteed the borrowings or provided some kind of

credit support for it.

Mr. SKILLING. Was providing some portion——

Senator FITZGERALD. So that it looks to me——

Mr. SKILLING. You do not have to go through specific transactions. I’ll give you an example, Senator. If you sell your house,

a lot of people when they sell their house provide seller finance.

And it is still a sale, I mean, once you’ve sold and you’re taking

a credit risk on the counterparty that has purchased that house.

That can be entirely appropriate in many, many circumstances. To

the extent that we were providing financing, we had a finance company.

Senator FITZGERALD. Did you consider these seller financing?

Mr. SKILLING. To the extent that I—we’d have to look at the very

specific transaction and what the structure of it was, but if someone had said to me that someone was buying something from us

and we were financing a portion of that purchase, I would have

said, ‘‘That’s no different than General Electric financing washing

machines.’’ It is a natural——

Senator FITZGERALD. And was the seller financing all disclosed in

your filings with the Securities Exchange Commission?

Mr. SKILLING. The balance sheet would show every time we had

an accounts receivable. Yes, sir.

Senator FITZGERALD. That you had, in fact, financed the purchaser’s purchase. That is all disclosed?

Mr. SKILLING. Senator, we did, in a typical year, I would imagine

we did 30,000 or 40,000—maybe more than that, maybe 50,000—

transactions. Did we separately disclose every single transaction?

You could not do it. I mean, you’d be sending the investors a phone

directory, you know, something of that size that had the information in it.

Senator FITZGERALD. Is this typical seller financing though when

it is not really an independent third party, when it is really a partnership that you own 97 percent of? Are not you really just doing

seller financing almost to yourself?

Mr. SKILLING. Senator, you’re—you have to ask the accountants

what the logic is that they used. But when they came to us, they

believed that our——

Senator FITZGERALD. It is not an accounting issue.

Mr. SKILLING. Why is that not an accounting issue?

Senator FITZGERALD. That is not the issue I’m raising. I’m just

saying——

Mr. SKILLING. Okay, then I’m missing something. Try it again.

Senator FITZGERALD. I mean you’re selling assets to something

that you own 97 percent of.

Mr. SKILLING. Right.

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Senator FITZGERALD. And you’re booking revenues based on those

sales.

Mr. SKILLING. Right. So they——

Senator FITZGERALD. Even though you are liable contingently for

the indebtedness incurred by the partnership.

Mr. SKILLING. Well, I’ll give you an example of where that would

be entirely appropriate. Let us say that I had a mortgage pool; I

had a pool of mortgages. And I put them into a pool and I put 3

percent sliver of equity in and I sold it. Now, once you’ve done that,

you have transferred risk, 3 percent risk. Turns out mortgages are

real safe. You know, the default rates are pretty low. And so the

accountants look at that once that risk transfer has occurred. They

look at that and they say has the risk transferred? If the risk

transfers, you have to account for it as a sale transaction.

So I would have to look at each of the individual transactions.

I cannot. I’m not an accountant, so I would not be able to look at

it. But was it appropriate to book revenue? Ask Arthur Andersen.

If it was inappropriate, we would not have done it. If it was inappropriate, if there was any time that there was anything that I was

aware of that was inappropriate, we would not have done it.

Senator FITZGERALD. Now were you aware that the company built up $20 billion in off balance sheet indebtedness in this manner? And that is why you had to file bankruptcy, is it not, because

those debts were coming due and you could not pay them?

Mr. SKILLING. I refer you again to the 10-K on page 72. It actually—it lists it out in detail.

Senator FITZGERALD. So you were totally aware of it, of all the

off balance sheet indebtedness?

Mr. SKILLING. And so was everyone else. So were the rating

agencies, so was everyone else. There was no attempt to hide——

Senator FITZGERALD. It never occurred to you that this was too

much debt to be—you were not concerned about how much debt

you were incurring?

Mr. SKILLING. We went to the rating agencies and we would

show them what our balance sheet was. We would show them those

same disclosures. They would go through and they’d look at it. And

they looked at it and they said we were BBB plus. Now is that a

reasonable number? I think so. We had a great business. We were

a major, major player in a very fast growing business in energy

wholesaling. That business was highly, highly profitable. We would

have made—if this catastrophe had not occurred, I believe strongly

that we would have made $220-$225—$2.20-$2.25 per share of real

live earnings in the year 2002. Put any kind of multiple against

that. Put a 20 multiple, put a 10 multiple against that. The stock

price at a minimum should have been in the $20 to $30 range.

Senator FITZGERALD. Enron just experienced a liquidity problem

last fall?

Mr. SKILLING. We had a run on the bank based on a loss of confidence that was related to all of this.

Senator FITZGERALD. But when they went into the bankruptcy it

turns out that people are not going to get 100 percent back on the

dollar, are they, creditors are not?

Mr. SKILLING. Any time you go into bankruptcy, all accounting,

all balance sheet transactions assume an ongoing business. Once

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you put a company through bankruptcy, I guarantee you you are

going to get a haircut on every asset that you have.

Senator FITZGERALD. Mr. McMahon, what percent on the dollar

do you think that creditors of Enron are going to get in the bankruptcy? Are they going to get over 50 percent on the dollar?

Mr. MCMAHON. Senator, I’m afraid it is way too early to even

make that analysis yet, but it is certainly less than 100 cents on

the dollar. We’ve recently disclosed that we believe the recovery on

the equity to be——

Senator FITZGERALD. Unattached.

Mr. MCMAHON. Basically zero, right. No——

Senator FITZGERALD. On the equity, well, certainly the equity’s

wiped out, but what about on the debts?

Mr. MCMAHON. Right. Well, that is my point. Since the equity’s

not going to get anything——

Senator FITZGERALD. Think it will be more than 50 cents on the

dollar?

Mr. MCMAHON. It is just too early to tell.

Senator FITZGERALD. Mr. Skilling, I dispute the notion that if it

is a solvent bank, if it were liquidated that it could not pay off all

its depositors. A solvent bank would liquidate its government

bonds. If its loans were what they said they were and it was a solvent bank, they would liquidate and sell the loans, and they would

have capital and surplus left over and everybody would get paid

off. You only have a problem and cannot pay off creditors if, in fact,

your liabilities exceed your assets. And my understanding from

what I’ve read is Enron’s going to be paying somewhere like 35

cents on the dollar back to its creditors.

Mr. SKILLING. Senator, you may be a great Senator, but when it

comes to understanding what happens in bankruptcy, I would suggest that if you put General Motors into bankruptcy tomorrow,

they are not going to be able to sell their machine tools for 100

cents on the dollar. That is just not what happens. When we used

to have runs on the banks in the late 1880s, as soon as that run

began it was, ‘‘Katie, bar the door,’’ because then the lenders, the

people that had borrowed the money decided they did not have to

pay it back; they were taking liquidity away from the corporation.

It is almost impossible—that is why it is so important that the

company got a couple of months. If the company had a couple of

months of breathing space, I think things would have turned out

okay. The company was solvent. The financial statements suggested the company was solvent. It was illiquid, not insolvent.

Senator FITZGERALD. Mr. Skilling, one of the first bank boards

my father was on in the 1950s, in those days they used to liquidate

banks, and it was because the owners just wanted to get their investment back. And they simply liquidated the bank and they paid

off everybody and paid their shareholders a return. I submit to you

that if a company is fully solvent, it can pay all its debts back and

pay back its retained earnings against capital and surplus. I agree

that——

Mr. SKILLING. In 3 days? If—in 3 days, if your creditors are saying I want the money right now, you cannot do that.

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Senator FITZGERALD. Obviously you cannot do it right away, but

over a period of time you can. And Enron got a timeout from the

bankruptcy and it is only going to pay back 35 cents on the dollar.

Mr. SKILLING. Enron has now got——

Senator FITZGERALD. It has way more liabilities than assets.

Mr. SKILLING. Enron has got lawsuits from any of a number of

claims. Once this thing happens, once you cross that corner, it is

very hard to turn around and go back the other direction. I mean

that is just the——

Senator FITZGERALD. All right.

Mr. SKILLING. That is the way it is always been.

Senator FITZGERALD. If I could go to Mr. McMahon, I’m going to

wrap up. I want to let all of you out. And my good Chairman, Senator Dorgan, who has been very indulgent, I appreciate it.

Mr. McMahon, Ms. Watkins was in the company in the CFO’s office for what, six weeks, Ms. Watkins, before you figured out that

it was all a house of cards?

Ms. WATKINS. Probably four to six weeks.

Senator FITZGERALD. Mr. McMahon, you were at Enron for many

years. You were treasurer from 1998 to March of 2000. Did you not

figure out it was a house of cards in all that time?

Mr. MCMAHON. No. Frankly, the first time I saw Enron having

financial problems was when I took over as CFO in the middle of

the crisis. And it was very clear at that point in time that there

was, in fact, an inability for the company to access capital in the

capital markets, in the bank markets. That was my first clue that

there was a major financial crisis at this company.

Senator FITZGERALD. So this all just went right over your head

all those years that you were there as treasurer?

Mr. MCMAHON. Even as Treasurer, I thought we had strong

businesses, and was not until I saw it in late October that—it was

not long before that that our CFO had told quite a lot of management that the balance sheet was in extremely good shape.

Senator FITZGERALD. And finally, wrapping up the first question

I asked you. I have some more details about that report the auditors gave in April 1987 to the Enron Board. They recommended to

the Enron Board in April 1987 that the two rogue executives who

had misappropriated money in New York, that they be terminated

immediately, and they were kept on at least three or four months

after that. And during that time, a control officer from Enron was

supposed to go out and watch them, and somehow he was delayed

several months in going out to watch them. And then during these

three to four months that these rogue traders remained at Enron

Oil, they ran up $1 billion in bad trades.

And then Rudy Giuliani, who was U.S. Attorney at the time,

started a prosecution investigation in the fall of 1987. The two

eventually pled guilty to over $100 million in bad trades and fraud.

One served time in jail and the other was put on probation. And

I said in that Vanity Fair article that I introduced into the record

earlier, that Mr. Lay was the one who resisted terminating these

employees, even though it was the unanimous recommendation of

the team of internal auditors and external auditors. And my understanding is you were on the term of external auditors at Arthur

Andersen at that time; is that correct?

103

Mr. MCMAHON. Yeah. In 1987, I was a—I think a junior manager at Arthur Andersen.

Senator FITZGERALD. But you were—did go to New York?

Mr. MCMAHON. Yes.

Senator FITZGERALD. Do you remember the recommendation to

the Enron Board?

Mr. MCMAHON. I do not recall. I mean, I know there was an internal control recommendation made, but I, you know, that was

prepared by the partner and the senior manager on the job.

Senator FITZGERALD. So you were not involved in that——

Mr. MCMAHON. Well, I was involved in the detailed audit work

at the offices in New York.

Senator FITZGERALD. And you never heard anything about: Boy,

they were awful slow to terminate those two execs who apparently

just took money and put it in their own account that was Enron

money?

Mr. MCMAHON. I do not recall. I mean, it is 15 years ago.

Senator FITZGERALD. Okay, okay.

Thank you very much, Mr. Chairman and all the panelists.

Thank you for being here. Thank you.

Senator DORGAN. Let me just finally ask Mr. McMahon. Have

you read the Powers Report?

Mr. MCMAHON. Yes, I have.

Senator DORGAN. Do you agree with it?

Mr. MCMAHON. I do not think I know enough of the details or

agree with one or the other. It raises some very, very serious concerns which we are investigating currently. We’ve made some very

significant personnel changes as a result of it.

Senator DORGAN. Have you fired people as a result of it?

Mr. MCMAHON. Yes, we have.

Senator DORGAN. How many?

Mr. MCMAHON. Well, the Chief Accounting Officer and Chief

Risk Officer have been discharged. The General Counsel has resigned, and we’ve made some internal moves within the accounting

department to give it new leadership, as well as our auditors have

been discharged.

Senator DORGAN. You fired employees because there was something wrong, something going on wrong that the Board of Directors’

report steered you to. Is that the basis of the dismissals?

Mr. MCMAHON. Yeah. I believe those—the Chief Risk Officer and

Chief Accounting Officer were discharged for cause pursuant to a

Board request.

Senator DORGAN. Is that at odds with what Mr. Skilling is telling

us today, that really things were fine?

Mr. MCMAHON. I mean I—obviously the Powers Report brought

to light some things that I do not—well, certainly the Powers Report brought things to light that needed some changing.

Senator DORGAN. Were they the things that you were attempting

to bring to Mr. Skilling’s attention many, many months before

that?

Mr. MCMAHON. Well, the Powers Report clearly talks about the

conflicts of interest that I was concerned about, but I think it obviously goes on to specific transactions which I was not aware of at

the time I brought that up to Mr. Skilling.

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Senator DORGAN. And do you believe Mr. Skilling was unaware

of all of this?

Mr. MCMAHON. I really do not know.

Senator DORGAN. But you believe you made Mr. Skilling aware

of some of it?

Mr. MCMAHON. Oh, clearly as far as the structure of the conflict

internally. You know, I recall very clearly our conversation. It was

a very big event in my life at that point in time. So my meeting

with Mr. Skilling was, after several meetings with my boss and

then the Policy Committee above my boss and going to Mr.

Skilling, I have a vivid recollection of that.

Senator DORGAN. That recollection is different than Mr. Skilling’s

recollection. Mr. Skilling testified in the House that you came to

see him about compensation, and he had no recollection of discussion beyond the issue of compensation; is that correct?

Mr. MCMAHON. That is the understanding—that, to me, is Mr.

Skilling’s testimony. And I did mention compensation as a symptom in that meeting, but I obviously had wider concerns than compensation.

Senator DORGAN. Let me ask Ms. Watkins, if I might. The import

of your testimony before the U.S. House was to suggest, I think,

at least as it was interpreted by the media, was that Mr. Lay was

sort of the unwitting, innocent victim here, ran the company but

did not really know very much. Was that your intention when you

testified? Is that a fair assessment of Mr. Lay’s role in the corporation?

Ms. WATKINS. I’m drawing that conclusion based on my eight

years at Enron, where I worked with a very hands-on Rich Kinder

as COO and a very hands-on Jeff Skilling as COO. I never had

very much interaction with Mr. Lay. This fall, when I did have

interaction and when I conveyed my concerns, I was extremely disappointed by his inability to grasp the dire situation the company

was in. His actions of writing this off with just no contingency

plans reaffirms my opinion that he did not get it.

Senator DORGAN. Did not want to get it or did not get it? I mean

you actually served it to him.

Ms. WATKINS. Well, could be a little bit of both, could be a little

bit of both.

Senator DORGAN. But you actually served it up on a platter, did

you not, to say ‘‘Here is the situation as I see it. And by the way,

do not ask Vinson & Elkins to look into it.’’ And what he did is he

asked that particular law firm to look into it, and then restricted

the law firm’s view with respect to the accounting pieces. I’m just

trying to understand what you’re saying about Mr. Lay’s role. Mr.

Lay came here and did not testify.

Ms. WATKINS. I’m just giving you my opinion based off my interactions with the people that I worked with at Enron. And this was

such a grave issue, and to see it written off and unwound, and we

did not even have an explanation ready for investors. October 23,

at an all employee meeting to address the write-down, Mr. Lay likened this crisis to poor investment decisions we had made, to the

Peruvians nationalizing our oil company in the 1980s. It is completely different.

105

Senator DORGAN. We are trying to get the names of the investors

in all of the partnerships and having an almost impossible time

getting them.

Mr. McMahon, you’re the President and COO of the company at

this point. I assume those records exist somewhere. I have talked

to the interim CEO, his attorney has called us back; I received

some piece of information that was indecipherable to me a couple

days ago. But this Committee intends to search for the names of

all of the investors in all of the partnerships, and I’m wondering

if you, as a President of the corporation, will be helping us in

achieving that goal.

Mr. MCMAHON. We’ll—Senator, we’ll obviously cooperate, as we

have been, fully. But please keep in mind these partnerships were

not sponsored by Enron, they are outside. So those documents

would not typically reside in the Enron offices, although as I understand our internal investigation sought—searched for those. So

we’ll continue to cooperate.

I do understand there is one particular one on LJM2; the limited

partners have filed a lawsuit in the State of Delaware. And so, I

think part of their lawsuit, those who’ve filed motions against the

general partner, I think that is a matter of public record on the

court’s website.

Senator DORGAN. But let me ask you, if an accountant comes to

you today as President of the company and says, ‘‘All right. Here

is a partnership, an off-the-books SPE partnership, and Enron

owns 97 percent of it, I want to see the records. I want to verify

that the other 3 percent is non-Enron. Show me the records.’’ What

are you going to show the partner, nothing? You’re going to have

to have the records, are not you?

Mr. MCMAHON. Sure. I think on these partnerships you’re talking about today, the LJM, et cetera, the—I do not know what due

diligence was done by the accounting group at the time. Clearly

going forward, whether we ever do another SPE again is another

question, but clearly, due diligence efforts for Enron going forward

would be much more stringent.

Senator DORGAN. Well, I must tell you that reading the Board of

Directors’ report, it appears to me that due diligence is a term that

is totally unknown inside that corporation. The construction of

some of these partnerships according to the Board of Directors report itself, paid no attention to due diligence.

But let me make a final point.

Mr. Skilling, at the start of today you were credited for testifying. I will similarly give you credit for coming. I must say that

it was disappointing to me that Mr. Lay would not testify. He has

every right not to testify.

I appreciate your testifying, Mr. Skilling, but I must tell you that

as I listened to your testimony, there are times when that Harvard

MBA shows through very well. You are articulate, incisive in your

analysis of complex financial transactions, and then, when pressed

on the Board of Directors investigative report you seem to me to

lapse into utter confusion about accounting. And somehow, it just

does not fit.

I do not know that we’ve gotten much closer to the truth today.

We have to keep digging, it seems to me. This is a miserable way

106

to spend a Tuesday, as a matter of fact, but then it is a small price

to pay compared to the loss of people that have lost their life savings and lost their jobs and lost their investments. So, we have to

continue this process.

It is not pleasant for you to come and sit at a table for five-anda-half hours. The Committee appreciates the fact that you are here

today, and we will be conducting about four additional hearings

dealing with other aspects of this. You have been very patient for

five-and-a-half hours and the Committee appreciates your attendance.

This hearing is adjourned.

[Whereupon, at 5:37 p.m. the hearing adjourned.]

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